1. Golden bank's balance sheet shows total liabilities of 15 million and total assets of 20 million....
Question:
1. Golden bank's balance sheet shows total liabilities of 15 million and total assets of 20 million. Over the next year, the banks assets are expected to grow following a normal distribution with a mean of 5.72% and a standard deviation of 15%. The bank determines its capital requirements using a 99% one-year VaR (Value-at-Risk). The standard normal variate corresponding to the 99% VaR is -2.33. Determine whether the banks current capital position is sufficient to meet its 99% one-year VaR specification.
a. The bank meets the capital requirement, its capital position exceeds the expected potential loss by 1.24 million.
b. The bank does not meet the capital requirement, the expected potential loss exceeds its capital position by 0.83 million.
c. The bank does not meet the capital requirement, the expected potential loss exceeds its capital position by 1.66 million.
d. The bank does not meet the capital requirement, the expected potential loss exceeds its capital position by 0.25 million.
2. A stock currently trades at a price of 50. Assume that after two months the stock price will either be a multiple of u=1.06 or d=0.96 of its current price. The risk-free interest rate is 10% per annum with continuous compounding. Using risk-neutral valuation and one-step binomial tree, what is the value of a two-month European call option with a strike price of 49?
a. Option value is 0.58
b. Option value is 1.71
c. Option value is 2.58
d. Option value is 3.23
3. Which of the following statements is NOT true concerning investors who buy or sell credit risk protection on a companys bonds or debt:
- a CDS it is a contract between the buyer and seller of the credit protection.
- the credit protection buyer must hold the bonds or debt.
- the bond issuer may not know about the existence of the credit protection contract.
- assuming that the investor does not own the companys bonds or debt, buying credit protection is like shorting a companys debt.