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P2.T9.805. The bank/capital markets nexus goes global (Song Shin)

Nicole Seaman

Director of FRM Operations
Staff member
Learning objectives: Describe the links between banks and capital markets. Explain the effects of forced deleveraging and the failure of covered interest rate parity. Discuss the US dollar’s role as the measure of the appetite for leverage. Describe the implications of a stronger US dollar on financial stability and the real economy


805.1. According to Hyun Song Shin, which of the following is an implication or consequence of a stronger US dollar?

a. Helps boost the activity of U.S. exporters
b. Hurts an un-hedged emerging market oil producer who borrows in dollars
c. Has no effect on a bank who hedges currency exposure on its balance sheet
d. Causes banks to increase their dollar lending

805.2. How does Hyun Song Shin demonstrate the failure of covered interest parity?

a. By showing the negative cross-currency basis for Euro, sterling, yen, and franc
b. By showing the positive cross-currency basis for Euro, sterling, yen, and franc
c. By showing that European banks have lent more in US dollars to borrowers in Asia than banks in the US
d. He actually provides evidence that the so-called failure of covered interest parity is a myth

805.3. In his discussion of the nexus between bank and capital markets, Hyun Song Shin asserts each of the following as true statements EXCEPT which is false?

a. The barometer of risk has passed from the VIX to the dollar: when the dollar is strong (weak), risk appetite is weak (strong)
b. When financial intermediaries are highly leveraged, small increases in collateral haircuts can lead to a dramatic reduction in balance sheet assets (aka, forced deleveraging)
c. The strong dollar is a significant feature in helping to achieve high productivity growth and growth in trade such as, for example, Asian export growth
d. Prior to the financial crisis, the VIX index was a barometer of leverage: when VIX was low (high), leverage was high (low); but since the crisis VIX this relationship has broken down

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