2) Suppose the CFO of an American corporation with surplus cash flow has $100 million to invest and the corporation does not believe it will need to utilize these funds to retool or expand production capacity for 1 year. Suppose further that the interest rate on 1 year CD deposits in US banks is 1 %, while the rate on 1 year CD deposits (denominated in British Pounds) is currently 1.8 %. Suppose further that the exchange rate currently is (.6) British pounds per $. What must the CFO expect about the Pounds/$ exchange rate 1 year from now if she chooses to invest in the US $ CD’s instead of the British Pound CD’s? (Note: a specific numeric answer is required for full credit. Part credit can be earned for correctly discussing the expected direction of change in the exchange rate without supplying an exact answer. 4pts.

3) Between February 2008 and Summer 2009 the Fed supplemented its open market operations with a greatly expanded program of direct lending (both overnight and short term 28 and 84 day loans) to commercial banks, investment banks, brokerage and primary dealer units of bank holding companies. It also agreed to accept a wider range of short term securities (instead of accepting only T-Bills) as collateral on these loans and even initiated a program to buy commercial paper from money market funds.

Explain why the Fed created all these extraordinary direct lending facilities instead of simply relying on traditional open market purchases of Treasury securities. 4 pts
4) As conditions in short term financial markets improved by summer of 2009 the Fed closed down its lending under these programs. However, throughout 2009 and in the first quarter of 2010 the Fed increased substantially its purchases of longer term mortgage backed securities and treasury notes from banks as it wound down its unusual lending loan facilities. Since then The Fed has continued to initiate unusually large “Quantitative Easing” (QE) Programs. Currently the Fed…