Schweser Book 2 Questions

Pg. 48 Question 7

The question states the bank has an influx of deposits and loan demand is down, thus the bank has an excess amount of cash on its book.

This statement is not addressed in the answer to the question though…I would think they should mention it in liquidity, return, and maybe unique circumanstance.

Whats your thought?

pg 111 bottom of page

An emerging market nation with an overvalued currency may encourage excessive borrowing by the em gov’t.

Can someone explain this relationship?

pg 118 savings-investment imbalances

I can’t seem to get my mind around the difference between saving and investing. I thought if you ate saving, then you are no investing? I’m kinda just looking for the concept in different words, if anyone is willing. Also, define savings deficiet?

This ties to page 140, where an increase in savings is suppose to increase economic growth, but it seems counterintuitive to me.

thnkas for the help!

Pg. 48 Question 7

Bank is fluxed with deposits but credit offtake is slow. Hence the bank is liquid & can lower the int rate to boost loans & increase Margin. It is not addressed in Liquidity section because Ques asks for IPS wrt to Securities portfolio. Since deposits are majorily short term in nature, depositors can withdraw anytime they wish so investment need to be in liquid securities which cab be readily sold to convert into cash & meet the liability.

pg 111 bottom of page

Suppose equilibrium price in emerging mkt like India should be INR48/ however at the exchange current rate is INR 42/ so the currency is overvalued. This will encourage Govt to go for more foreign debt outside India. Since the currency is overvalued, interest payment in foreign currency lets say in dollar terms will be lower than domestic interest cost.

savings-investment imbalances

It says if the Domestic savings are less than the investment happening in country, then foreign capital is required to meet the investment demand. This would lead to capital flight in the saving deficit country which commands high rate of return due to investment opportunities. Hence currency will appreciate.

Increase in domestic Saving means now country can put ptimally more funds to use which is cheaper than foreign debt in capital generating projects i.e. infrastructure, education etc. Hence more savings may mean more investment (which also means low int rate due to high liquidity in the domestic mkt) will lead country to progress & increase economic growth.