5.What do you think are five riskiest country in the world today?

Republic of South Sudan, Somalia, The Central African Repunlic, Iraq, Burundi. Because in
these countries, political instability such as wars, riots, and protests leads to economic
inability to develop
6.Using no more than ten variables, construct a simple model to measure country risk?
Do you weight all variables equally?What are the contraints to your model? under what
circumstances do you expect it to perform well
CR = aX + bY + cP + dGDP +fM + e
CR rep country risk
X represents the risk premium for inflation a represents the coefficient for the risk premium
of inflation
Y represents the risk premium for interest
b represents the coefficient for the risk premium for the rate of interest
P represents the risk premium for political uncertainty. This is usually more for disturbed
nations and less for developing countries. It is least for developed nations.
c represents the coefficient for the risk premium for political uncertainty.
GDP represents the risk premium related to the country's GDP. It is more for disturbed
nations, less for developing nations and least for the developed nations.
d represents the coefficient for the risk premium for the GDP.
M is the risk premium related to miscellaneous factors like legislature, regulations, law
enforcement, and the ease of carrying out business. The miscellaneous risk premium is
usually less though it may be significant due to the mentioned factors.
f rep coefficient for risk premium for factors of risk related to M
e rep error term to account for the inaccurate measurement of coefficients.
The coefficients for each of the factors differ depending on the relative weight given to each
factor. The coefficients will not be equal as the different factors will be determined to have
different levels of impact and thus all variables are not weighted equally. For each individual
country being evaluated, the value input for each risk premium variable varies depending on
the relative varying levels of risk for that factor specific to the country being evaluated
For example, unstable regimes have a maximum value input on stability, whereas for
developed nations the maximum risk inputs are for rates of interest and GDP. The idea is to
use this one equation with the same coefficients to evaluate the overall relative level of
country risk for different countries that have different levels of risk for the individual
parameters.
The model may be anticipated to do well during normal times, but not so well in war times,
times of recession, and other disturbance when the risk premiums because some factors grow
exponentially.
7.Who was to blame for the Latin American debt crisis of the 1980s? To what extent
should greedy bankers bear responsibity for what happened?
During the 1970s, two large oil price shocks created current account deficits in many Latin
American countries. At the same time, these shocks created current account surpluses among
oil-exporting countries. With the encouragement of the US government, large US money-
center banks were willing intermediaries between the two groups, providing the exporting
countries with a safe, liquid place for their funds and then lending those funds to Latin
America (FDIC 1997).
Latin American borrowing from US commercial banks and other creditors increased
dramatically during the 1970s. At the end of 1970, total outstanding debt from all sources
totaled only $29 billion, but by the end of 1978, that number had skyrocketed to $159 billion.
By 1982, the debt level reached $327 billion (FDIC 1997).
In response, many banks stopped new overseas lending and tried to collect on and restructure
existing loan portfolios. The abrupt cut-off in bank financing plunged many Latin American
countries into deep recession and laid bare the shortcomings of previous economic policies,
described by former Federal Reserve Governor Roger W. Ferguson, Jr. as based on “high
domestic consumption, heavy borrowing from abroad, unsustainable currency levels, and
excessive intervention by government into the economy”
8. Who was to blame for the Asian contagion of 1997-98? To what extent do you blame
greedy bankers for this crisis?
The Asian Financial Crisis was a financial crisis that began in July 1997 in Thailand and
affected stock markets, major currency centers, and the prices of other assets in several Asian
countries. Asia, many of which are referred to as the "East Asian Tigers". This crisis is also
known as the Asian Currency Crisis.
Indonesia, South Korea and Thailand are the countries most affected by this crisis. Hong
Kong, Malaysia, Laos, and the Philippines were also severely affected by the sudden drop in
prices. Mainland China, Taiwan, Singapore and Vietnam are also affected but not too much.
Japan was also not affected much by the crisis, but the Japanese economy had to overcome its
own long-term economic difficulties.
Although called the "East Asian" crisis because it originated in East Asia, its effects spread
globally and caused a global financial crisis, with widespread effects. to countries like Russia,
Brazil and the United States.
9.What are the similarities between the Latin American debt crisis of the 1980s and
Asian contagion of 1997-98? What are the differences? Do you think that bankers
learned from their mistakes in Latin America? How likely do you think another
international financial crisis similar to those two is in the future?
The similiarirties between Latin American and Asian crisis are , in both the crisis the
economic crisis spread throughout the region and therefore a number of countries were
affected
When we consider the debt crisis in the 1980s and the currency crises in the 1990s, an
interesting comparison can be made between Latin America and East Asia. While both
regions were affected by these crises, Latin America was more severely impacted by the
1980s crisis while East Asia was more directly hit by the 1990s crisis.
After the Asian crisis of 1997-98, some people argued that the high growth of East Asia was
now over, the Asian development model was no longer useful, and Asia would have hard
time growing in the early 21st century. It is true that some Asian economies (for example,
Japan, the Philippines and Indonesia) struggled economically and/or politically in the
aftermath of the crisis. But we also see strong growth dynamism too (for example, China,
Vietnam and Thailand). It is a bit of exaggeration to say that the Asian crisis permanently and
significantly reduced the growth prospects of the region. I think East Asia is still dynamic,
even with many problems.
In the long-term perspective, it is undeniable that East Asia as a region has succeeded in
sustaining growth and improving living standards. This is in sharp contrast to the Latin
American experience where consistent growth has been highly elusive. In the 19th century,
Argentina was one of the "developed" countries with relatively high income. But since then,
its development path has been strewn with many instabilities. Even in the early 21st century,
it remains a developing country saddled with gigantic economic problems.
But if we take a long-run view and compare East Asia and Latin America, it is hardly
deniable that East Asia on the whole has succeeded more brilliantly in economic
development. Many economies in East Asia (but not all of them--at least not yet) have raised
income significantly and promoted industrialization after political independence, and
especially during the last few decades

10.What are hedge funds? Explain the interplay between bankers and hedge funds.
A hedge fund is an unregulated alternative investment vehicle that uses a wide selection of
strategies and financial instruments (unavailable to regulated pooled funds) to achieve strong
returns independent of market performance.
A pooled fund collects money from many individual investors with the intention of using the
accumulated capital for investment purposes. Investors share the profits, should any be
earned.
Regulated pooled funds, like mutual funds, are open to retail investors – but, owing to this,
they must adhere to the rules and restrictions laid out by the relevant regulatory authority
Unregulated pooled funds, like hedge funds, aren’t constrained to the same degree, and are
not available to retail investors. This relative freedom from regulation allows hedge fund
managers to engage in high risk tactics like taking short positions and trading with leveraged
derivatives
A major advantage of hedge funds comes from their ability to mitigate market risk by
diversifying an investment portfolio. Market risk is the risk that the stock market as a whole
will experience a downturn. If this happens to a portfolio containing many stocks, the value
of the portfolio will likely decrease in step with the market.
As alternative investment vehicles that can look to opportunities outside of the stock market,
and by using derivatives to take short positions in the market, hedge funds stand to earn
positive results even when the market is falling.
11.Suppose you were a banker in the mid-1990s. Would you have extended credit to
LTCM? Why or why not? Would you have participated in its bailout?
I will not give credit to ltcm. Because LTCM started with $1.25 billion, making it the largest
and most flexible hedge fund in the world at the time. After deducting commissions,
shareholder returns were 42.8% in 1995, 40.8% in 1996 and 17.4% in 1997. At the beginning
of 1998, LTCM's capital was $4.8 billion with the loan capacity of 200 billion and the
account status of secondary products of more than 1,200 billion USD. With such
achievements, LTCM leaders are more adventurous every day. They are so arrogant that they
offer to return the capital to anyone who wants to ask for details about their investment
policy.
After the Asian financial crisis in 1997, an increase in the discount rate for bonds caused
LTCM's interest to fall. But the leader of LTCM still predicts that the situation will quickly
return to the way it was before