Bank managers must maintain adequate liquidity and capital, and banks must manage the risks they face in order to protect their liquidity and capital positions. Failure to manage these risks effectively can lead to, at a minimum, greater regulatory scrutiny and limits on the banks activities. At worst, a failure to maintain adequate capital and liquidity can lead to the bank being taken over by bank regulators, shareholders losing their investments, and bank managers being targets of legal action.

The objective of this assignment is for you to analyze and gain a solid understanding of the responsibilities of bank management, and the risks of not managing a bank properly.

Your project must include the following elements:

• Discuss the primary sources of income and expenses for banks.

• Discuss the recent trends concerning bank earnings and performance.

• Explain the profitability versus safety trade-off faced by banks.

• Discuss how banks manage their liquidity risk.

• Explain how liquidity risk can lead to a banks failure.

• Describe the capital requirements faced by banks.

• Describe how banks measure interest rate risk.

• Explain how one can use options on financial futures to manage interest rate risk.