Answer all the questions. Questions in part A to be answered in around 500 words each and questions in part B in around 300 words each.
Part A:
Question 1: Explain the nature of the financial system in a modern economy giving the significant kinds of constituent institutions, markets and instruments. Describe the concept of flow-of-funds in the financial markets.
Question 2: Discuss the Markowitz theory of efficient portfolio selection. How does the CAPM (Capital Asset Pricing Model) theory build on it?
Part B:
Question 3: Critically observe the main theories which have been put forward to describe the term structure of interest rates.
Question 4: Discuss the Black-Scholes formula on derivative pricing.
Question 5: Discuss the concept of leverage for a firm. Discuss the significant financial and leverage ratios used. Elucidate the Merton-Miller theorem.
Question 6: Describe the need for, and the role of, depository systems in the secondary markets. Describe the concept of custodial services.
Question 7: Compare the impact of monetary policy beneath fixed exchange rates with those under flexible exchange rates.