FCSUN Difference Between An Rate Swap And A Currency Swap Worksheet 1. In an interest rate swap: there is no credit risk associated with receiving the prom

FCSUN Difference Between An Rate Swap And A Currency Swap Worksheet 1. In an interest rate swap:
there is no credit risk associated with receiving the promised interest rate payments.
the swap dealer faces no credit risk; only the counterparties are exposed.
counterparty credit risk has been assumed by the swap dealer.
the swap dealer assumes the risk of each counterparty defaulting on its respective principal payments.
Which of the following statements are true about derivatives?
True or False? The difference between an interest rate swap and a currency swap is that an interest rate swap is an exchange of fixed-interest payments for floating rate payments, while a currency swap is an exchange of two cash flows from sources denominated in different currencies.
True or False? There can be currency swaps that also exchange fixed- for floating-rates.
In the basic “repricing gap” model, an increase in market interest rates would:
lower the book value of stockholders’ equity of a bank with a negative 1-year gap.
lower the net interest income of a bank with a negative 1-year gap.
increase the net interest income of a bank with a positive 1-year gap.
increase the market value of bank assets.
The difference between a bank’s average loans and its average deposits is called the:
financing gap
liquidity index
core deposit surplus
stored liquidity
purchased liquidity
When the spread between interest rates on RSA and RSL ____________, the bank’s net interest income would be expected to ____________.
increases; increase
increases; decrease
decreases; increase
b and c
Study the following Balance Sheet. Based on its structure, what is the potential liability to the bank if interest rates decrease 1% during a 1-year period?
No risk to the Bank, it has no repricing gap.
No risk to the Bank, it has a negative repricing gap.
The bank is exposed to about -$30 million for every 1% increase in interest rates, so the bank has negative repricing gap.
The bank is exposed to $30 million for every 1% in interest rates, so the bank has positive repricing gap.
None of the above.
Northridge 1st National Bank is experiencing an unexpected and large number of requests for funds under existing loan commitments. This is the essence of:
asset side liquidity risk
credit risk
net deposit drain
liability side liquidity risk
a and d
A bank has just completed an internal stress test and finds that it has a repricing risk of -0.5% to its cash flow for every 1% upward shift in interest rates. What should the bank do to mitigate its risk?
It should securitize and sell its loan portfolio, retaining only the servicing rights.
It should become a counterparty to a currency swap.
It should sell some of its real estate assets.
It should issue more stock to bolster capital reserves.
It should become a counterparty to an interest rate swap.
Either a or e.
Either a, c, d, or e.
All of these are viable.
Standard Acme Bancorp has the following assets. What is its Liquidity Index?
What is the effect of a 1% change in interest rates for Bank X given its 2-year repricing gap?
Your bank has $153 million in loan commitments which are now being drawn upon. You aren’t sure, but you are beginning to think that the bank may have some problems now. What sort of risk are you concerned about, and how can you remediate it?
a.Underwriting risk; tighten credit requirements.
Liquidity risk; enter the repo market.
Solvency risk; sell assets or sell a secondary stock issue.
Interest rate risk; arrange an interest rate swap.
Off-Balance Sheet Risk; arrange swaps, swaptions or forwards at the time the loan commitment is made.
Your bank has a customer in England and needs cash for a project there. You are concerned about what will happen to this loan when it funds, but this client is important to the bank and you want to do it. What sort of risk are you concerned about, and how can you remediate it?
a.Underwriting risk; tighten credit requirements.
Liquidity risk; enter the repo market.
Currency risk; arrange a currency swap.
Interest rate risk; arrange an interest rate swap.
e.Off-Balance Sheet Risk; arrange swaps swaptions or forwards at the time the loan commitment is made.
After an internal audit, your bank has determined that it has a negative repricing gap. What sort of risk are you concerned about, and how can you remediate it?
Underwriting risk; tighten credit requirements.
Liquidity risk; enter the repo market.
Currency risk; arrange a currency swap.
Interest rate risk; arrange an interest rate swap.
Off-Balance Sheet Risk; arrange swaps swaptions or forwards at the time the loan commitment is made.
When a bank relies on a policy of “purchased liquidity,” it will generally be
using less financial leverage
using cheaper funds
earning a lower return on its investments
using more expensive funds
Assuming the following balance sheet, what is the Bank’s CAR?
Please view the following balance sheet for the Bank of New Providence:
Please view the following balance sheet for the Bank of New Providence:
When a bank relies on a policy of “purchased liquidity,” it will generally be:
using less financial leverage.
using cheaper funds.
selling assets.
using more expensive funds.
When a bank deals with deposit “drainage” by buying more fed funds or entering the repurchase agreement market, we say the bank is using:
long-term funding sources.
core deposits.
purchased liquidity.
liquidation of assets.
brokered deposits.
Note the following schedules from the National Bank of Newton. What is the bank’s NSFR?
Value at Risk for a given risky portfolio is defined as:
The underlying volatility of the equity portfolio.
The maximum loss that can be experienced in the risky portfolio over a specified holding period.
The worst-case loss that can be experienced in the risky portfolio given a certain level of probability.
The regulatory capital needed to cover the underlying risk in the equity portfolio.
None of the above.
True or False? Not only can hedging mitigate risks to the financial intermediary, but if done correctly, it is costless.
Derivatives are securities whose payoff is linked to another security; the payoff is never assured with certainty.
A swap is a derivative instrument between counterparties that only exchanges a series of cash flows for specific time period at specific intervals; notionals are never swapped.
Notionals are standardized and tradable derivatives.
All derivatives have potential outcomes which may be unfavorable to one of the parties.
One of the counterparties will always have off-balance-sheet liability risk.
Only I. is correct.
Only II, III, IV and V are true.
II and V are false; all others are true
Only II and III are false, all the others are true
None are correct (very tricky, professor)

Bank “A” Balance Sheet (in $1,000,000s)

Assets

Liabilities

Cash & Cash Equivalents

$ 5.00

Demand Deposits

$ 508.00

Loans: Fixed-Rate

Passbook Accounts

$ 978.00

<6-month $ 23.00 3-Mo Comm'l Paper $ 2.70 6-12 months $ 22.00 Time Deposits: 1-year $ 134.00 1-year $ 2,335.50 2-years $ 142.00 2-year $ 1,226.80 >15-years

$ 5,567.00

3-5 year

$ 928.40

Loans: Variable-Rate

30-bonds

$ 1,705.60

10-year variable

$ 345.00

Equity

$ 920.00

30-year variable

$ 2,367.00

OBS Liabilities

TOTAL:

$ 8,605.00

$ 8,605.00

Item

$ in $1,000s

$ in $1,000s

Risk-Adjustor

Cash

345,000

100%

Short-term Treasuries

12,546,800

100%

Treasury Bonds

609,765

100%

Corporate Bonds

235,680

80%

Muni Bonds

125,600

75%

Loans

345,075,000

Real Estate Loans

275,680,000

90%

Consumer Loans

12,865,000

85%

Comm’l/Bus Loans

56,530,000

95%

Real Estate

345,000

65%

Goodwill & Other Intangibles

2,675,000

0%

$ 359,957,845

90.8
91.5
89.7
89.0

Bank X Balance Sheet (in $1,000,000s)

Assets

Avg Rate

Liabilities

Avg Rate

Cash & Cash Equivalents

$ 5.00

0.00%

Demand Deposits

$ 508.00

0.00%

Loans: Fixed-Rate

Passbook Accounts

$ 978.00

0.25%

<6-month $ 23.00 1.50% 3-Mo Comm'l Paper $ 2.70 0.45% 6-12 months $ 22.00 1.50% Time Deposits: 1-year $ 134.00 2.20% 1-year $ 2,335.50 1.00% 2-years $ 142.00 2.65% 2-year $ 1,226.80 1.35% >15-years

$ 5,567.00

5.00%

3-5 year

$ 928.40

2.56%

Loans: Variable-Rate

30-bonds

$ 1,705.60

5.50%

10-year variable

$ 345.00

3.50%

Equity

$ 920.00

6.50%

30-year variable

$ 2,367.00

4.20%

OBS Liabilities

TOTAL:

$ 8,605.00

$ 8,605.00

$42,220,000
($42,220,000)
$4,170,000
($4,170,000)

ASSETS ($1,000,000s)

LIABILITIES AND EQUITY ($1,000,000s)

Cash

185

Demand Deposits

2187

Fed Reserve Deposits

97

Time Deposits

2210

Treasuries

548

Bonds/Other Debt

258

Mortgages

2561

Equity

270

Commercial Loans

1298

Stocks and Bonds

236

TOTAL ASSETS

4925

TOTAL LIABS & EQUITY

4925

ASSETS ($1,000,000s)

LIABILITIES($1,000,000s)

Cash

52

Deposits

650

T-Bills and Bonds

257

Long-term Debt

326

Loans to Other Banks

95

Equity

88

Commercial Loans

364

Mortgages

296

TOTAL

1064

TOTAL

1064

The net profit for the bank was $10.3 million. A required reserve is specified at 5% of deposits. What is the bank’s ROE?

ASSETS ($1,000,000s)

LIABILITIES($1,000,000s)

Cash

52

Deposits

650

T-Bills and Bonds

257

Long-term Debt

326

Loans to Other Banks

95

Equity

88

Commercial Loans

364

Mortgages

296

TOTAL

1064

TOTAL

1064

The net profit for the bank was $10.3 million. A required reserve is specified at 5% of deposits. What is the bank’s ROA?

$

ASF FACTOR

ASF

$

RSF FACTOR

RSF

Demand Deposits

$100.86

100%

$100.86

Cash

$215.03

0%

$ –

Savings Accounts

$25.48

95%

$24.21

Dep w/ Fed Res

$327.00

0%

$ –

CDs Maturities < 1 yr $1258.32 90% $1132.49 Net Cash fr Banks $36.41 0% $ - CDs Maturities > 1 yr

$1752.30

0%

$ –

Treasuries

$458.65

5%

$22.93

Business Accounts

$2586.21

50%

$1293.11

Loans, Mat < 1 yr $997.25 50% 498.63 Bank Debt $544.88 0% $ - Loans, Mat > 1 yr

$1085.62

100%

$1085.62

Federal Reserve Loan

$251.30

100%

$251.30

Mortgages

$2050.85

50%

$1025.43

EQUITY

$685.60

100%

$685.60

CMOs, CDOs, MBBs

$267.72

65%

$174.02

TOT ASF Liab + Eqty

$7205.95

$3487.56

TOT RSF

$5438.53

$2806.62

24.A given bank has the following interest?sensitive assets and liabilities on its balance sheet (in $ millions). If the interest rate rises by 1.5%, what is the change of profit?

Interest rate sensitive assets

Interest rate sensitive liabilities

Short term securities

$150

Deposits

$659

Loans

$575