1.A bank has assets of A (B), and liabilities of 2.0B. One year asset returns are normally distributed with a mean of 0.05 and standard deviation of 0.15, while liability returns are normally distributed with a mean of 0.03 and standard deviation of 0.05. These returns have a correlation of 0.2.

a.Current capital is C₀ = A - 2.0. What is the mean and standard deviation of C₁, the capital at the end of the year?

b.The bank claims that A is large enough that the probability of failure in one year is 0.1%, i.e., Pr[C₁ 0]=0.001. What equation needs to be solved to determine A from this given that z_0.001 = -3.62? You do not need to solve this.