Chapter 10The Alchemists of FinanceExercises1. Questions on the text1) Whats the main difference between commercial banks and investment banks?In todays 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 an investment 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 alchemists 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 financial center?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 emerging markets 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, whats the relationship between revenue and risk in finance?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) Its 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 refining industry. 7) We shall never know how she managed to acquire her promotion; there is no way to account for it.8) A nationwide law aimed at stamping out passive smoking in public spaces in Switzerland came into force on Saturday.9) Innovations will bring about dramatic changes in this industrial sector. 10) I would say that, on balan