Download EC362 Economics of Financial Markets Exam 2008, NUI Galway and more Exams Financial Accounting in PDF only on Docsity! EC362 Semester 2 2008 Page 1 of 4 Ollscoil na hÉireann, Gaillimh GX_____ National University of Ireland, Galway Semester 2 Examinations 2008 Exam Code(s) 3BA1, 3BA5, 4BA4, 3BC1, 4BC2, 4BC3, 4BC4, 3FM2, 1EM1, 1OA1 Exam(s) B.A., B.Comm., B.Comm. International, 3rd B.Sc. in Financial Mathematics and Economics, Erasmus, Visiting Students Module Code(s) EC362 Module(s) ECONOMICS OF FINANCIAL MARKETS Paper No. 1 Repeat Paper Special Paper External Examiner(s) Professor C. Ryan Internal Examiner(s) Mr. B. Kennelly Mr. C. Twomey Instructions: Section A – answer 2 out of 3 questions (25 marks) Section B - answer 3 out of 5 questions (75 marks) There are 100 marks in total. All questions will be marked equally. If you attempt MORE THAN the correct number indicate clearly those questions which you wish to be graded. Duration 2hrs No. of Answer Books 1 Requirements: None No. of Pages 5 Department(s) Economics EC362 Semester 2 2008 Page 2 of 4 SECTION A Answer 2 questions. All questions are worth 12.5 marks. A1. The Economist’s Big Mac index offers an informal guide as to whether currencies are at their correct levels, according to the notion of purchasing-power parity. Use the data in the following table to answer the questions below: Country Big Mac Price Actual Exchange Rate Chile 1,565 pesos 527 pesos/$ Russia 52 Rouble 25.6 Rouble/$ South Africa 15.5 Rand 6.97 Rand/$ (a) Explain briefly the difference between absolute and relative purchasing-power parity (PPP). (b) For each country, compute the implied purchasing-power parity exchange rate of the local currency per U.S. dollar if the U.S. price of a Big Mac was $3.41 and the percentage under- or overvaluation of each currency versus the U.S. dollar according to the Big Mac version of purchasing-power parity. A2. (a) List and explain briefly how the four determinants of asset demand affect the demand for bonds. (b) Using the above analysis, explain using a diagram the effect on interest rates if, other things held constant: (a) There is an increase in the volatility of bond prices; (b) There is a sudden decrease in people’s expectations of future property prices. A3. At year-end 2007, a London-based analyst expected that BP’s earnings and dividends would grow at 12% for 4 years, after which growth would fall to a long-term growth rate of 6.5%. The analyst also projected a risk-free rate of 4%, a UK stock market risk premium of 6% and that BP had a beta of 0.9. BP had also just paid a dividend of £1.50 per share. (a) The equity analyst uses the following two-stage dividend growth model: 5 31 2 4 0 1 2 3 4 4 ( ) (1 ) (1 ) (1 ) (1 ) (1 ) D DD D D k gV k k k k k −= + + + + + + + + + Explain the logic behind the above equation to calculate BP’s stock price. (b) Using the data and the above formula calculate the implied fair price of BP shares. List any two limitations of dividend models to calculate stock prices.
