1) Which factor, irrational expectation or over-borrowing, matters more for a financial crisis? Why?
2) What are the three types of financial assets? Which type is unique (relative to the other two) to you? Why?
3) I expect IBM stock's price to drop tomorrow and want to short sell IBM to capture this opportunity. The current IBM stock is $100 per share. I borrow one IBM share from my broker and sell it on the market right away. The initial margin requirement is 50% and the maintenance margin requirement is 40%.
a. How much my own money should I put into my margin account initially?
b. If IBM stock rises to 120$ tomorrow, will I receive a margin call?
c. If I have to close the margin account (spending 120$ on a IBM share and returning it to my broker), what will my return be?
4) Show an example of information asymmetry and agency problems in financial markets.
5) History shows that, on average, there are only up to 10 days in any year when stock market has a 10%+ daily return. Is this against market efficiency? Why?