Article 1 Authors: Christian Ewerhart, Nuno Cassola, Steen Ejerskov, Natacha Valla Title of the article: Manipulation in money markets Journal Name: International Journal of Central Banking, March 2007 Summary The article talks about the impact of manipulation in the implementation of the monetary policy. The authors claim that as a result of the impulsive reactions to the fundamental index of interbank interest rates, manipulation has turned out to be a major challenge for the operational enactment of the monetary policy. Therefore, to address the issue, the authors have focused on a microstructure model whereby a commercial bank can have a strategic alternative to the standing facilities of the central bank. They typify equilibrium where market rates are positively manipulated. The findings of the study prove that manipulation can be lucrative for a commercial bank with appropriate ex-ante features. And so, manipulation will continue to be a characteristic of equilibrium albeit stakeholders in the derivatives market create rational prospects regarding potential manipulation. The authors conclude by recognizing that the monetary authority has controlling techniques to fight manipulation and that further vigilance is required to ascertain that there is no operational manipulation (Ewerhart, Cassola, Ejerskov, & Valla, 2007). Key points The principal ideas discussed in the article regarding manipulation in the money markets include: · Manipulation is a potential concern in money markets, particularly when a commercial bank holds a profitable position in which it can gain from may be an increase in interest rates. · From an operational viewpoint, manipulation can increase volatility to the immediate interest rate thereby complicating the liquidity control of both the central bank and the commercial banks. · Manipulation can have an impact on the market's confidence during a smooth execution of monetary policy, which will in turn affect the long-term refinancing conditions thereby upsetting the effectiveness of the monetary policy. · The decision to manipulate a market by a commercial bank is contingent on factors such as the bank's general trading and deposit capacities, its readiness to take premeditated measures in search of profitable frontiers as well as the internal distribution of its risk budget between money markets. · Competition amongst potential manipulators cannot impede the likelihood of manipulation. · The immediate reaction by the central bank can help in reducing the volatility in the money markets caused by manipulations. Reaction to the article The microstructure model used in the study to show that manipulation can be lucrative for a commercial bank is efficient to illustrate the nature of financial markets. The model implies that investors can benefit from insider information and use it to change the nature of financial markets. In the financial stock market, insider information may lead to trading of stocks between invest ...

1. Article 1
Authors: Christian Ewerhart, Nuno Cassola, Steen Ejerskov,
Natacha Valla
Title of the article: Manipulation in money markets
Journal Name: International Journal of Central Banking, March
2007
Summary
The article talks about the impact of manipulation in the
implementation of the monetary policy. The authors claim that
as a result of the impulsive reactions to the fundamental index
of interbank interest rates, manipulation has turned out to be a
major challenge for the operational enactment of the monetary
policy. Therefore, to address the issue, the authors have focused
on a microstructure model whereby a commercial bank can have
a strategic alternative to the standing facilities of the central
bank. They typify equilibrium where market rates are positively
manipulated. The findings of the study prove that manipulation
can be lucrative for a commercial bank with appropriate ex-ante
features. And so, manipulation will continue to be a
characteristic of equilibrium albeit stakeholders in the
derivatives market create rational prospects regarding potential
manipulation. The authors conclude by recognizing that the
monetary authority has controlling techniques to fight
manipulation and that further vigilance is required to ascertain
that there is no operational manipulation (Ewerhart, Cassola,
Ejerskov, & Valla, 2007).
Key points
The principal ideas discussed in the article regarding
manipulation in the money markets include:
· Manipulation is a potential concern in money markets,
particularly when a commercial bank holds a profitable position
in which it can gain from may be an increase in interest rates.
· From an operational viewpoint, manipulation can increase

2. volatility to the immediate interest rate thereby complicating
the liquidity control of both the central bank and the
commercial banks.
· Manipulation can have an impact on the market's confidence
during a smooth execution of monetary policy, which will in
turn affect the long-term refinancing conditions thereby
upsetting the effectiveness of the monetary policy.
· The decision to manipulate a market by a commercial bank is
contingent on factors such as the bank's general trading and
deposit capacities, its readiness to take premeditated measures
in search of profitable frontiers as well as the internal
distribution of its risk budget between money markets.
· Competition amongst potential manipulators cannot impede
the likelihood of manipulation.
· The immediate reaction by the central bank can help in
reducing the volatility in the money markets caused by
manipulations.
Reaction to the article
The microstructure model used in the study to show that
manipulation can be lucrative for a commercial bank is efficient
to illustrate the nature of financial markets. The model implies
that investors can benefit from insider information and use it to
change the nature of financial markets. In the financial stock
market, insider information may lead to trading of stocks
between investors rather than directly from the company to
investors (Hillier, Grinblatt, & Titman, 2011). As a result, the
company will not gain from the trade since the money will be
exchanged between two investors. This is similar to the
manipulative nature of the commercial bank that ultimately
leads to money market volatility making it difficult for the
central bank to control the money markets.
Furthermore, the authors stress that the manipulation by the
commercial bank can only be reduced through the immediate
reaction by the central bank (Ewerhart, Cassola, Ejerskov, &
Valla, 2007). This will reduce the likelihood of market

3. volatility or changes in interest rates that would be profitable
for the manipulators. Interest rates can be altered by many
factors including inflation, the liquidity premium and risk-free
rate, which in turn affect the value of money (Saunders &
Cornett, 2012). According to the study, manipulation may result
in interest rate volatility. Therefore, regulators of financial
markets need to respond immediately to any anomalies in the
market such as insider trading to prevent unplanned alterations
to the market interest rates. In conclusion, the study clearly
gives an illustration of the consequences of inadvertent change
in interest rates on the financial markets.
Article 2
An economy should have a stable financial system. It is
observed that after the Great Depression in the financial system,
several regulatory measures were implemented. The regulatory
policies that were enacted have been seen to be successful in
creating a safer financial system than it was before. However, it
is imperative to note that despite the fact that the measures
achieved their goal in solving the problem of the Great
Depression, it is still not adequate for addressing the risk in the
financial system. The economic environment is changing
gradually therefore calling for a need to use more efficient
measures to ensure that financial stability is maintained. This
essay is going to do a review on the article concerning the
major elements of creating a road to financial security.
The financial system can be said to comprise of two parts. The
markets where the resources exist, and prices determined and
the institutions such as the banks that have the balance sheets to
monitor and screen. These two elements have to work in
cooperation so as to create stability and balance of the financial
system. Banking regulation aim at minimizing all forms of risk
that the individual institutions may incur. Liquidity requirement
is meant to constrain any liquid liabilities that may result in
funding illiquid assets. It is brought into effect by the liquidity

4. coverage ratio and the net stable funding ratio. They aim at
limiting liquidity transformation and controlling the level of
maturity transformation respectively. Moreover, they seek in
ensuring that banks have an adequate stock of high-quality
liquid assets. It ensures that it can be converted easily into cash
to meet liquidity needs in case of a stress scenario (Cecchetti &
others, 2015).
Capital regulation is another means of ensuring financial
stability. It is masked with implementing of discretionary time-
varying capital requirements and maintaining a steady state
level of capital. Notably, any changes to the capital
requirements can lead to influence on the computation of the
related risks and the capital itself or the ratio between these
two. It is observed that on an unweight basis capital should be
in the range of ten percent. On the other hand, risk-weighted
capital requirements should be in the range of ten to twelve
percent. Banks should ensure to maintain a measure of risk
sensitivity. It will necessitate the avoidance of loading up on
risky assets. One monetary policy that can bring this into effect
is the use of rules that are based on the changes in the economic
activity. It will be more efficient than the standards based on
the level of economic activity.
Markedly, time-varying capital requirements is seen to affect
the economic activity similarly. It influences asset prices,
changing loan supply, financial conditions and borrowers net
worth. Macroprudential policy is observed to affect political
resistance and governance (Cecchetti & others, 2015).
Moreover, time-varying capital requirements concerns itself
with the ability of decision makers to make timely decisions and
responses. Information and recognition flags are set to indicate
the level of vulnerability of the financial system. On the other
hand, the implementation and transmission lags are essential in
determining the duration it will take for the policy makers to
increase the capital requirements and the rate of impact it will

5. have on the financial system. It is worthy to note that a higher
capital requirement than the one that is currently in place is
needed to promote a stable financial system. Time-varying
discretion policies should be avoided to prevent any form of
risks.
References
Cecchetti, S. G., & others. (2015). The Road to Financial
Stability: Capital Regulation, Liquidity Regulation, and
Resolution. International Journal of Central Banking, 11(3),
127–139.
Article 3
In this case, we look at the primary issue of article review to get
the message in a detailed form. The paper will focus on
“Manipulation in Money Markets” by Christian Ewerhart(2007).
In the main currency areas, interest rates derivatives are among
the most actively traded financial instruments. Manipulation
challenge has increased for the operational implementation of
monetary policy, with figures of positions reacting instantly to
the underlying index of daily interbank rates. In this case,
interest rates are manipulated positively following strict
probability. In the monetary policy implementation, a large
number of central banks globally have paid attention to
increasing some short-term money market rates of interest.
Various financial institutions would increase policy rates to
attract more revenues since market rates are expected to rise.
The strategy this banks use to achieve this is borrowing money
from local banks and later deposit the money with the central
bank. The manipulator net position will increase since the rates
rise temporarily (Ewerhart et al., 2007).
In this case, manipulation took place in several episodes. The
first episode was between may24-June 23, 2000.During this
period, the policy rates rose from 3.75 percent to 4.25%. There
were several speculations on the policy switch and tie scale. In

6. the year 2000 the prices doubled, and the impact was felt on the
bank system changing. Ahead of a crucial part of maintenance
changed the liquidity conditions recourse, and there was an
immediate increase of the EONIA. However, the second episode
of money market manipulation took place in April 24-May 23,
2003. During this period, there was a fall in the policies by 50.
EONIA rose beyond the people expectations or rather a
minimum point. Following this reaction, a response was put
forward and borrowing a large amount of money was the
response. The act had immense impacts since EONIA fell
immediately.
For two reasons manipulation is undesirable mainly for a central
bank. Manipulation has the likelihood to add capriciousness to
the overnight rates and to obfuscate the liquidity management of
commercial and central banks, from an operational perspective.
In a smooth implementation of monetary policy manipulation
may impact the market’s confidence, which may affect
refinancing conditions on long-term and, therefore, monetary
policy effectiveness (Ewerhart et al., 2007). Having sufficient
information is important in this case for traders (participants) to
avoid any manipulation. In the money market, there is various
ways manipulation takes place.
In case of high money circulation in the market, the central
bank will correct the situation with increasing borrowing rates,
and this encourages savings. People will save more and borrow
less and this in turn lowers money circulation. However, with
small money distribution the central bank corrects this case
through reducing interest rates to increase borrowing and
discourage savings. The additional value for her derivatives
position and cost of taking control of the market prices are the
challenges the manipulator faces. The trader will be induced to
leverage her derivatives position and to in turn manipulate the
money market, as it turns out that the tradeoff will sometimes,
but not always affect the trader. A public good lowers
individual incentives for manipulation, yet the problem is not
entirely. Apparently, this problem (manipulation) requires

7. solutions, and there are a number that have been proposed. Fine
tuning and limiting of the path set by the firm facilities are
some of the corrective policies.
References
Ewerhart, C., Cassola, N., Ejerskov, S., & Valla, N. (2007).
Manipulation in money markets. Swiss Finance Institute
Research Paper, (29). Retrieved from
http://www.ijcb.org/journal/ijcb07q1a4.pdf
Article 4
Author of Article: Ricardo Sanchez
Serrano_____________________
Title of Article:_ Issues Affecting the Banking
Industry____________________
Journal/ Newspaper/ Web site—Name and date:
_____http://www.thebanker.com January
2010____________________
Summary of Article:
The article is about the banking industry and financial
institutions. The banking industry has a major role to play in the
market development and how they operate. They help countries
and communities by lending and raising money as well as
getting involved in the development. Their involvement in the
development sector helps because the banks institutions tend to
face some challenges at times. Some of the specific financial
issues faced include the ethical issue. The financial institutions
that include all sort of banks, pension funds, credit agencies,
insurance, private firms among others are all sources of wealth.
How financial institutions perform is based on how well they
can maximize their financial assets, how well their investment
decisions are and the return they get from them, the profits they
get from loans, credits, issued equity and the bonds. Financial
institutions are now sophisticated and complex on how they run

8. their operations, their services, and products. Everything tends
to be a big puzzle with these banking institutions as time
progresses like how they invest their resources and promote
their credit facilities.
Key Points:
The key points derived from this article are:
· Banks today cannot give full details about their
clients/customers like where, when and how they operate. This
is because they do not follow up as much, and the customers
change and keep changing as the banks also do.
· Banks are intermediaries of money, and so it is important to
understand how the bank handles it. The individual investors
own the money that the bank invests and, therefore, have a right
to follow up with the specific banking institution. The financial
institutions supply and move the money. In case anything goes
wrong, the banking sector is responsible and not the individual
investor.
· Banks are a source of generating wealth for its shareholders.
They do this by charging interest rates on loans and other
activities that do need financing.
· The current events that affect these financial issues include
usury whereby, banks charge unreasonable and unfair interests
and tend to take extra benefits from their customers. They
encourage customers into taking credits that in turn have very
high-interest rates hence going into huge debts.
· Engaging in speculative investments is yet another issue. The
banks practice investments and credit lending practices that
cannot be trusted. They take an unnecessary risk that in turn can
cost the banking institution. This can also lead to losses for the
customers, and their wealth destroyed completely. Financial
professionals and bankers should be responsible and take
responsible action when lending and investing their clients’
money.
· Banks give loans to companies and individuals and them in
turn use the money to market. Some of the companies financed
use the money to run illegal businesses like selling illegal

9. firearms and investing in weapons and arms or financing illegal
groups or cartels in different countries. This is possible because
no regulation(s) prevents the financial institutions from lending
money to companies or to invest in them.
Your Reaction to Article:
The article gives an insight of how the bank and financial
institutions run as well as the things that go on and helps the
people understand that as customers and individual
shareholders, they should be involved and understand how their
money is being used. The institutions should always do a
background on the companies involved in investing or giving
loans. It encourages the individual investors and helps them
understand that they have a duty to pressure the banks and
regulators and know how their resources are being used.
Article 5
Author of Article: Ricardo Caballero and Arvind
Krishnamurthy.
Title of Article: Exchange Rate Volatility and the Credit
Channel in Emerging Markets: A Vertical Perspective.
Journal/ Newspaper/ Web site—Name and date:
http://www.ijcb.org: 19th May 2005.
Summary of Article:
The article evaluates how foreign exchange volatility affects the
ability of financial institutions to provide credit in emerging
markets. The author notes that volatility in exchange rates leads
to a sudden decrease in capital flows. They note that during the
moderate crisis, monetary expansion will solve the problem.
However, during a severe crisis, the policy effects significantly
vanishes. The higher exchange rate reduces the dollar value of
domestic collateral to an equilibrium point with domestic
financial markets and the external constraint. In such a context,
the expansionary monetary policy increases the value of internal
collateral but exacerbates the depreciation of exchange rates.
Therefore, the policy has minimal effect on the aggregate
financial activities.

10. Key Points:
· The credit constraints in emerging markets originate from the
country level or the market level.
· The paper evaluates the insurance effects of monetary policy.
· The paper also assesses whether contractionary or
expansionary monetary policy is the best in offsetting foreign
exchange volatility.
Your Reaction to Article:
One would agree with the author’s conclusion that monetary
expansion policy have minimal effects during the severe crisis
as witnessed in Greece crisis. However, in stable economies
where the change in the exchange rate is sudden, expanding the
money market serves to shift the equilibrium position in a
firm’s credit (Devereux, 2003). Expansion policies increase a
company’s lending capacity due to the increased liquidity.
However, the increase in cash means the firm will have to offer
loans at a lower interest rates. Engel (2003) also arrives at the
conclusion by noting that during the crisis, the dollarized
balance sheets undo the benefits of lowering interest rates.
Secondly, one would concur with the authors’ view of how
monetary policy affects a firm’s insurance decisions. An
individual monetary rule influences a company’s ex-ante
decisions due to the relative price of domestic to international
liquidity (Caballero, 2004). If a corporation foresees a dogged
defense of exchange rates, it also anticipates a decline in the
value of domestic and international liquidity value. For
instance, if the Yen depreciates against the dollar, the
government may initiate expansionary policy by lowering the
interest rates. However, most financial institutions will prefer to
buy more dollars while withholding their foreign exchange
reserves as they fear the Yen will continue to depreciate.

11. Instruction: Please solve following 10 questions (show the
detailed works). Each question is accounted for 10 points. There
is 20% deduction for untyped homework. This homework is due
at 11:59 pm on Sept. 14, 2015.
1. Consider a coupon bond that has a $1,000 par value and a
coupon rate of 12% The bond is currently selling for $1,280 and
has 12 years to maturity. What is the bond’s yield to maturity?
2. Consider a bond that promises the following cash flows.
Year : 0 1 2 3 4
Promised Payments: 150 170 210 260
Assuming all market interest rates are 14%, what is the duration
of this bond?
3. You are willing to pay $25,000 now to purchase a perpetuity
which will pay you and your heirs $2,200 each year, forever,
starting at the end of this year. If your required rate of return
does not change, how much would you be willing to pay if this
were a 15-year, annual payment, ordinary annuity instead of a
perpetuity?
4. The demand curve and supply curve for bonds are estimated
using the following equations:
Demand: P = - (5/6)Q + 1400
Supply: P = (1/3)Q + 700

12. As the stock market continued to rise, the Federal Reserve felt
the need to increase the interest rates. As a result, the new
market interest rate increased to 14%, but the equilibrium
quantity remained unchanged. What are the new demand and
supply equations? Assume parallel shifts in the equations.
5. The one-year interest rate over the next 10 years will be 3%,
4.5%, 6%, 7.5%, 9%, 10.5%, 13%, 14.5%, 16%, 17.5%. Using
the pure expectations theory, what will be the interest rates on a
4-year bond, 7-year bond, and 10-year bond?
6. A bank has two, 3-year commercial loans with a present
value of $80 million. The first is a $30 million loan that
requires a single payment of $37.8 million in 3 years, with no
other payments until then. The second is for $50 million. It
requires an annual interest payment of $4.5 million. The
principal of $50 million is due in 3 years. The general level of
interest rates is 7%. What is the duration of the bank’s
commercial loan portfolio?
7. One-year T-bill rates are 3% currently. If interest rates are
expected to go up after 4 years by 3% every year, what should
be the required interest rate on a 10-year bond issued today?
8. Calculate the present value of a $1,000 zero-coupon bond
with 8 years to maturity if the required annual interest rate is
12%.
9. Calculate the duration of a $1,000, 5% coupon bond with
three years to maturity. Assume that all market interest rates is
8% for next three years.
10. An economist has estimated that, near the point of
equilibrium, the demand curve and supply curve for bonds can
be estimated using the following equations:
Demand: P =-(2/7)Q + 1000
Supply: P = (1/7)Q + 700
a. What is the expected equilibrium price and quantity of bonds
in this market?
b. Given your answer to part (a), which is the expected interest
rate in this market?