(a) Briefly explain off-balance-sheet assets and off-balance-sheet liabilities with appropriate examples.

(b) Assume a bank has bought a call option on bonds with a notional value of $200. Further assume that the delta of the option is calculated at 0.45 and a beta of 2. (i) What is the contingent asset value (round to two decimals)? (ii) how would you interpret the delta of 0.45?

(c) Assume a bank grants a loan commitment at an interest rate of 10% per annum and the risk premium on the loan is 2%. The bank charges borrowers an upfront fee on the whole commitment of 0.25% and a back-end fee on any unused proportion of the loan of 0.5%. The compensating balance is 10% and so are reserve requirements. Assume that the average draw-down of the loan is 80% over the time of the loan commitment. What is the promised return on the loan commitment (round to two decimals)? (2 marks)

(d) Briefly describe the following types of off-balance-sheet activities: derivative contract and loans sold (2 marks)