Chapter 10The Alchemists of FinanceExercises1. Questions on the text1)Wha t’s the main difference between commercial banks and investmentbanks?In today's business environment, the main business of commercial banks is to collect deposits and make loans, while that of investment banks is to underwrite stocks and bonds and advise companies on mergers and acquisitions.2)Why do investment banks try to keep quiet about their big profits?Investment banks try to keep quiet about their big profits for two major reasons: first, they are under more scrutiny by regulators and investors; second, private equity and hedge funds have overtaken them in raising money and making excessive bets.3)What changes have taken place in the financial markets since the 1980s?The main changes since 1980s have been the rapid growth of financial instruments with unprecedented breadth, depth and richness, brought out by technology and innovation. Examples of those financial instruments are public and private debt securities and derivatives.4)Why do bankers and regulators worry about a possible collapse of aninvestment bank?They worry about a possible collapse of an investment bank because such an event will have serious implications for the whole financial system, and it is vital to know how such institutions evolve, how they handle risks and how well those risks are spread around the financial system.5)Which three factors can explain the huge profit for investment banks?Those factors are: first, the alchemist's trick of turning debt (mostly leaden) into derivatives (mostly liquid); second, the emergence of a new class of leveraged client (hedge funds and private equity); third, seeking out new capital markets and clients around the world. Meanwhile, in all these pursuits the banks are now using their own money, to differing degrees.6)What does the expression “the wild east〞refer to?That expression refers to the new markets emerging in Europe and Asia. The introduction of the euro in 1999 and the rapid growth of economies in those regions have attracted investment banks.7)What makes London an impressive rival to New York as a global financialcenter?London has become an impressive rival to New York as a global financial center because: first, London trades a wide range of assets and is regulated on the spot;second, London is a hub for Europe and continent European countries can raise capital there; third, London is also regarded as a springboard for emergingmarkets such as China and Russia.8)How do investment banks manage the risks?Investment banks try to find the most talented people to handle the intricate assets;they measure the correlations between different financial instruments in an attempt to spread risk; they invest hundreds of millions of dollars a year in technologies to measure and stress-test risks; they also try to boost their risk-weighted capital.9)According to the text, what’s the relationship between revenue and risk infinance?The relationship between revenue and risk is fundamental in finance. Risk-taking is awarded by possible high revenue. Low risk often means less revenue.However, in order to gain more revenue, you need to take more risks. You should carefully calculate the risk and balance it against revenue beforehand, or you will pay a high price for foolish investment bet.10)Which one is more important to the growth of the finance industry,innovation or regulation?Based on the text, both innovation and regulation are vital to the healthy growth of the finance industry. Without innovation, investors have fewer places to gain returns on their money and those seeking money would have much more difficulties in obtaining it. Thus innovation boosts the rapid growth of finance industry and brings benefits to more people both in developed countries and developing countries. However, innovation without proper regulation, such as the securities that no one knows how to exactly measure their risk, could lead the growth of the finance industry to a disastrous end.2. Fill in each blank of the following sentences with one of the phrases in the list given below:1)The government has taken many measures to bring down the prices of oil.2)Employees are asked to keep quiet about their year-end bonus.3)Regulators demand the monopoly company to split into smaller entities.4)It’s reported that China Telecom plans to spin off its network services unit in HK.5)The traffic had seized up for miles because of the accident.6)According to those representatives, new forces are at work in the refiningindustry.7)We shall never know how she managed to acquire her promotion; there is no wayto account for it.8) A nationwide law aimed at stamping out passive smoking in public spaces inSwitzerland came into force on Saturday.9)Innovations will bring about dramatic changes in this industrial sector.10)I would say that, on balance, it hasn't been a bad year.3. Match the terms in column A with the explanations in column B:A B1) liquidity crisis a) a bank that provides checking accounts,savings accounts, and money market accountsand that accepts time deposits. 62) leveraged buy-out b) a company issues common stock or shares tothe public for the first time. 53) credit crunch c) the situation in which a business experiences alack of cash required to grow the business, payfor day-to-day operations, or meet its debtobligations when they are due, causing it todefault. 14) over-the-counter securities d) the acquisition of another company usinga significant amount of borrowed money(bonds or loans) to meet the cost of acquisition.25) initial public offering e) a financial institution that assists individuals,corporations and governments in raisingcapital by underwriting and/or acting as theclient's agent in the issuance of securities. 8 6) commercial bank f) an aggressively managed portfolio ofinvestments that uses advanced investmentstrategies such as leveraged, long, short andderivative positions in both domestic andinternational markets with the goal ofgenerating high returns. 97) stress test g) a sharp increase in the interest rates and astrong decrease in allocated credits. 38) investment bank h) a process that measures whether oneinstitution has adequate capital and/or assetsto respond effectively to various, adversescenarios usually presented by a computerprogram. 79) hedge fund i) securities traded in some context other than ona formal exchange such as the NYSE, etc. 410) risk management j) the identification, assessment, andprioritization of risks followed by coordinatedand economical application of resources tominimize, monitor, and control the probabilityand/or impact of unfortunate events or tomaximize the realization of opportunities. 104.Translate the following into Chinese：在去年信贷危机爆发的时候，联邦的监管者们向国内的各主要金融机构注入了数以百亿计美元，而他们这么做的原因在于这些银行是如此之大以至于官员们担忧它们的破产将会拖垮整个金融体系。
