Makeup

Q1

Locational Arbitrage can occur in the form of buying from the bank of Orleans and selling to the bank of Kansas. In this arbitrage it can be seen that the profit is $.01 per pound.

Q2

Duration gap is the difference between the assets and liabilities that are being held and an institution of a financial nature.

Q3

Maturity Matching is a principal that denotes that the current assets are to be matched with the current liabilities and long term assets are to be matched with long term liabilities. It helps in reducing interest rate as the matched assets and liabilities have similar durations so this lowers the interest rate.

Q4

The changes in risk premium does effect the commercial banks required rate of return in numerous ways as the risk premium increases the required rate increases and with the fall of required rate of return. So the relationship between these two variables is direct.

Q5

The ratio of the bank that puts assets in the numerator and capital in the denominator, the higher the ratio the lower the equity and the higher the funds borrowed.

Q6

a

b

c

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