Risk of liquidit

1. True, False or Uncertain? Discuss the arguments underlying your choice. No points will be given without a good explanation. (Good explanations might be only three lines long. No more than fivelines justification in any point, please.) [10 points for each item.]

i. “If the interest rate is zero, a promise to receive a $100 payment one year from now is equal in value to receiving $100today.”
False. Analyzing only the payment of $ 100, FVn= PV(1 i), FVn= PV(1 0),
FVn=PV, but we must take account of inflation, when prices rise, the money value decreases.
It is expected that prices willincrease in the future, so the value of $ 100 in the future will be less than the value of $ 100 at present.

ii. “The difference between standard deviation and value at risk is that value at riskis a more common measure in financial circles than is standard deviation.”
False. Standard deviation in the most common measure of financial risk, and for most purposes it is adequate because it ismeasured in the same unit as the payoff: dollars. But in some circumstances we need to take a different approach to the measurement risk. In some cases we are less concerned with the spread of possibleoutcomes than with the value of the worst outcome.

iii. “A bank with a high debt-to-equity ratio may be more profitable than a bank with a lower ratio, and it also has a lower level of risk.”False. The debt-to-equity ratio measures the financial risk of bank debt by the fact, therefore, if this ratio is high the bank is heavily in debt, has more pledged their assets, will be more profitablein the short term, but its level risk is higher.

iv. “Financial intermediaries reduce the problems in lending associated with
information asymmetries by charging interest rates high enough todiscourage
undesirable borrowers.”
True. If the bank( financial intermediate) doesn’t have clear information about the borrower or the information is conflicting( asymmetric information problems)...