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Please Be Accurate And Cite Any References Used Please Be Accurate And Cite Any References Used Please Be Accurate And Cite Any References Used Please Be Accurate And Cite Any References Used Please Be Accurate And Cite Any References Used Please Be Accurate And Cite Any References Used Please Be Accurate And Cite Any References Used Book Used Financial Markets and Institutions: 6th Edition Author: Saunders, Anthony and Marcia Millon Cornett Publisher: McGraw-Hill/Irwin ISBN: 978-0-07-786166-7. Answer: Rate-sensitive assets = Rate-sensitive liabilities = Repricing gap = NII = $100 $50 $50 $0.5 million million million million Impact on Net Interest Income NII = -$0.50 b) Rate-sensitive assets = Rate-sensitive liabilities = Repricing gap = NII = $50 $150 -$100 -$1.0 million million million million NII = $1.0 c) Rate-sensitive assets = Rate-sensitive liabilities = Repricing gap = NII = $75 $70 $5.0 $0.1 million million million million NII = -$0.05 d) In part 1 and part 3 FIs are highly exposed to the decrease in interest rate. In contrast part 2 is ex to increase in the interest rate. In part 3) FI's has the least exposure to the interest rate risk as it h lower gap between the absolute value of repricing which is contrast to Part 1). a) References Madura, J. (2014). International financial management(12th ed.). Boston, MA: Cengage Learning. n Net Interest Income million million million ate. In contrast part 2 is exposed the interest rate risk as it has Part 1). MA: Cengage Learning. Answer: Floating Rate Mortgage = Floating Rate Mortgage Interest Rate = 30-Years Fixed Rate Loans = Current Loan Rate = $60,000,000 10% $90,000,000 7% a) Current expected interest income = Expected interest expense = Expected net interest income = $12,300,000 $7,800,000 $4,500,000 b) 200 basis point interest rate increase = Therefore, the decline is = c) One-year or funding gap = change in repricing net Interest income using the funding gap model = NOW Deposits = NOW Deposits interest rates = 5-year time deposit = 5-year time deposit interest rate = Equity = Total = $3,600,000 $900,000 ($45,000,000) ($900,000) W Deposits = W Deposits interest rates = r time deposit = r time deposit interest rate = y= = $105,000,000 6% $25,000,000 6% $20,000,000 $150,000,000 Answer: Repricing GAP = Gap ratio = $175,000 11.15% b) II = IE = NII = $2,475 $1,312.50 $1,162.50 c) When the interest rate was increasing CGAP was positive. Due to this reason the income from the resulted in an overall increase in NII. The Net increase income is also increase due to Spread. Her increased by 10 basis points. In general the net interest income increase to the same extent of the a) References Madura, J. (2014). International financial management(12th ed.). Boston, MA: Cengage Learning. Rate Sensitive = Fixed Rate = Non Earning = Total = $550,000 $755,000 $265,000 $1,570,000 Avg. Rate 7.75% 8.75% reason the income from the income exceded the interest expense. This ncrease due to Spread. Here they have mentioned that the Sread has e to the same extent of the increase in spread. MA: Cengage Learning. Rate Sensitive = Fixed Rate = Non Paying = Total = $375,000 $805,000 $390,000 $1,570,000 Avg. Rate 6.25% 7.50% a) Repricing gap using a 30-day planning period = Using a 3-month planning period (91 days) = Reprising gap using a 2-year planning period = -$95,000,000 -$20,000,000 $55,000,000 b) If interest rates increase 50 basis points then the net interest income = -$475,000 c) The repricing gap over the 1-year planning period = $35,000,000 d) If interest rates increase 50 basis points, then net interest income = $175,000 Answer: a) Duration Coupon YTM Face Value Time 1 2 Duration = b) 2 10% 14% $1,000 Cash Flow $100 $1,100 1.91 Expected Change in price = New Price = Years PV of Cash Flow PV of Cash Flow*Time $87.72 $87.72 $846.41 $1,692.83 $934.13 $1,780.55 Years $7.81 $941.94 Anwers: a) b) c) d) e) Year 1 2 3 4 5 Cash Flow PV of Cash Flow PV of Cash Flow * Year 7.8 $6.96 $6.96 7.8 $6.22 $12.44 7.8 $5.55 $16.66 7.8 $4.96 $19.83 72.8 $41.31 $206.54 $65.00 $262.43 Duration = Duration = Year 1 2 Years 1.397 Cash Flow PV of Cash Flow PV of Cash Flow * Year 1.6 $1.48 $1.48 21.6 $18.52 $37.04 $20.00 $38.52 Duration = Duration = 4.037 0.5535 $1.926 Years Years Gotbucks Bank's duration gap is = If all interest rates increase by 1% = GBL's assets is $220 million, if interest rates increased by 1% then the market value of equity would fall by = 0.8942 0.8942% 1.967 million to 18.033 millions Answer: a) b) c) d) e) Total assets = Total liabilities = 3045 2330 Interest Rate Assumed as = The weighted average duration of the assets = 6.55 Years The weighted average duration of the FI's liabilities = 0.90 Years The FI's leveraged adjusted duration gap is = 5.86 Year 6% The market value of the equity will change as follows: E = -84.14466 thousands The loss in equity $84,144.66 will reduce the equity (net worth) to $630,855 The change in the value of equity is: E = $42,072 The market value of equity (net worth) will increase by $42,072 to $757,072 As there in increase in the interest rate, banks should sell future contract and there will decrease in the value. But there is an option for buy back of future contract for realizing profit to balance the equity value decrease. References Madura, J. (2014). International financial management(12th ed.). Boston, MA: Cengage Learning. Answer: A spot contract is an immediate contract where purchase or sales made immediately for cash, it the time business transaction is made that is the time 0. Both future and forward agreement are entered at time 0 buyer and seller for the exchange of underlying asset at a future date for a specific price and at a particu Future contracts are standardized and are traded on an exchange, while a forward contract are not stand they are OTC contracts. Counterparty risk is higher for a forward contract when compared to a future c Mark to market is available in the futures contract, unlike forwarding contract. In most of the cases, pro delivered in a forward contract, unlike future contract. References Madura, J. (2014). International financial management(12th ed.). Boston, MA: Cengage Learning. mediately for cash, it the time when the greement are entered at time 0 between the specific price and at a particular time. orward contract are not standardized, and when compared to a future contract. tract. In most of the cases, products are MA: Cengage Learning. Answer: a) Interest plus principal expense on six-month CD = Principal of Swedish bond = Interest and principle = Interest and principle in dollars if hedged = Spread = b) Net interest income should be = 5000 Interest income = $1,037,500 Forward rate = SK5,763,888.89/$1,037,500 = $1,032,500 5,555,555.56 SK 5,763,888.89 SK 1,043,263.89 0.010764 $0.18 /SKr In order for the spread to remain at 1% per year theforward and Spot must be same. Answers: a) b) c) d) e) Contracts are necessary to fully hedge the bank = 377.06 Contracts For an increase in rates of 100 basis points change in the cash balance sheet position is as follows: Expected E = -$3,272,727.27 Change in bond value = -$8,797.51 Change in 377 contracts = -$3,316,662.06 Stock could be repurchased for a gain = $3,316,662.06 The difference between the two values is a net gain = $43,934.79 For an increase in rates of 50 basis points change in the cash balance sheet position is as follows: Expected E = $1,636,363.64 Change in bond value = $4,398.76 Change in 377 contracts = $1,658,331.03 Stock could be repurchased for a gain = -$1,658,331.03 The difference between the two values is a net loss = -$21,967.39 (or) $21,967.39 Contracts are necessary to fully hedge the balance sheet = 1469.39 Contracts When there is a requirement for more number of Treasury bonds for hedging the balance sheet items using macrohedge, the finanical institution should consider about the number of Treasury bonds deliverables held or available for them. Even though there is a higher requirement for Treasury bill contract for hedging balance sheet than the Treasury bonds, the fact is that Treasury bill market has more depth and number of deliverables are lesser. References Madura, J. (2014). International financial management(12th ed.). Boston, MA: Cengage Learning. Loss ance sheet items asury bonds r Treasury bill bill market has Answer: a) b) c) If the bank sells with recourse, it should expect = $9.8723 millions If the bank sells without recourse, it should expect = $9.8093 millions If the bank expects a 0.5 percent probability of default on this loan it should expect to receive = $9.8229 With the 0.5% of probability of default the expected value is still higher than selling it without recourse. Hence the bank must sell with recourse. References Madura, J. (2014). International financial management(12th ed.). Boston, MA: Cengage Learning. e Learning. Answer: a) b) The duration of the existing loan Incase of purchasing $5 million in loans with an avg. duration of 7 years, its portfolio duration would increase to = = = = 0+$15,000,000/$20,000,000(X) = 3.5 years $15,000,000 = 70000000 X X= 4.6667 Years 5.25 Years From the above calucltaion it is clear that if FI purchaes $5 million loan then its duartion is 5.25 years which is more than the average duration of asset 5 years. Hence FI must consider other loan with a lesser duartion. The FI should seek to purchase a loan of the following duration = $5m/$20m(X) + $15m/$20m(4.667 years) = 5 years $5m/$20m(X) + 3.5 = 5 Years $5m/$20m(X) = 1.5 $5m = 30 X X= 6 Years Answer: Rate-sensitive assets = Rate-sensitive liabilities = Repricing gap = NII = $100 $50 $50 $0.5 million million million million Impact on Net Interest Income NII = -$0.50 b) Rate-sensitive assets = Rate-sensitive liabilities = Repricing gap = NII = $50 $150 -$100 -$1.0 million million million million NII = $1.0 c) Rate-sensitive assets = Rate-sensitive liabilities = Repricing gap = NII = $75 $70 $5.0 $0.1 million million million million NII = -$0.05 d) In part 1 and part 3 FIs are highly exposed to the decrease in interest rate. In contrast part 2 is ex to increase in the interest rate. In part 3) FI's has the least exposure to the interest rate risk as it h lower gap between the absolute value of repricing which is contrast to Part 1). a) References Madura, J. (2014). International financial management(12th ed.). Boston, MA: Cengage Learning. n Net Interest Income million million million ate. In contrast part 2 is exposed the interest rate risk as it has Part 1). MA: Cengage Learning. Answer: Floating Rate Mortgage = Floating Rate Mortgage Interest Rate = 30-Years Fixed Rate Loans = Current Loan Rate = $60,000,000 10% $90,000,000 7% a) Current expected interest income = Expected interest expense = Expected net interest income = $12,300,000 $7,800,000 $4,500,000 b) 200 basis point interest rate increase = Therefore, the decline is = c) One-year or funding gap = change in repricing net Interest income using the funding gap model = NOW Deposits = NOW Deposits interest rates = 5-year time deposit = 5-year time deposit interest rate = Equity = Total = $3,600,000 $900,000 ($45,000,000) ($900,000) W Deposits = W Deposits interest rates = r time deposit = r time deposit interest rate = y= = $105,000,000 6% $25,000,000 6% $20,000,000 $150,000,000 Answer: Repricing GAP = Gap ratio = $175,000 11.15% b) II = IE = NII = $2,475 $1,312.50 $1,162.50 c) When the interest rate was increasing CGAP was positive. Due to this reason the income from the resulted in an overall increase in NII. The Net increase income is also increase due to Spread. Her increased by 10 basis points. In general the net interest income increase to the same extent of the a) References Madura, J. (2014). International financial management(12th ed.). Boston, MA: Cengage Learning. Rate Sensitive = Fixed Rate = Non Earning = Total = $550,000 $755,000 $265,000 $1,570,000 Avg. Rate 7.75% 8.75% reason the income from the income exceded the interest expense. This ncrease due to Spread. Here they have mentioned that the Sread has e to the same extent of the increase in spread. MA: Cengage Learning. Rate Sensitive = Fixed Rate = Non Paying = Total = $375,000 $805,000 $390,000 $1,570,000 Avg. Rate 6.25% 7.50% a) Repricing gap using a 30-day planning period = Using a 3-month planning period (91 days) = Reprising gap using a 2-year planning period = -$95,000,000 -$20,000,000 $55,000,000 b) If interest rates increase 50 basis points then the net interest income = -$475,000 c) The repricing gap over the 1-year planning period = $35,000,000 d) If interest rates increase 50 basis points, then net interest income = $175,000 Answer: a) Duration Coupon YTM Face Value Time 1 2 Duration = b) 2 10% 14% $1,000 Cash Flow $100 $1,100 1.91 Expected Change in price = New Price = Years PV of Cash Flow PV of Cash Flow*Time $87.72 $87.72 $846.41 $1,692.83 $934.13 $1,780.55 Years $7.81 $941.94 Anwers: a) b) c) d) e) Year 1 2 3 4 5 Cash Flow PV of Cash Flow PV of Cash Flow * Year 7.8 $6.96 $6.96 7.8 $6.22 $12.44 7.8 $5.55 $16.66 7.8 $4.96 $19.83 72.8 $41.31 $206.54 $65.00 $262.43 Duration = Duration = Year 1 2 Years 1.397 Cash Flow PV of Cash Flow PV of Cash Flow * Year 1.6 $1.48 $1.48 21.6 $18.52 $37.04 $20.00 $38.52 Duration = Duration = 4.037 0.5535 $1.926 Years Years Gotbucks Bank's duration gap is = If all interest rates increase by 1% = GBL's assets is $220 million, if interest rates increased by 1% then the market value of equity would fall by = 0.8942 0.8942% 1.967 million to 18.033 millions Answer: a) b) c) d) e) Total assets = Total liabilities = 3045 2330 Interest Rate Assumed as = The weighted average duration of the assets = 6.55 Years The weighted average duration of the FI's liabilities = 0.90 Years The FI's leveraged adjusted duration gap is = 5.86 Year 6% The market value of the equity will change as follows: E = -84.14466 thousands The loss in equity $84,144.66 will reduce the equity (net worth) to $630,855 The change in the value of equity is: E = $42,072 The market value of equity (net worth) will increase by $42,072 to $757,072 As there in increase in the interest rate, banks should sell future contract and there will decrease in the value. But there is an option for buy back of future contract for realizing profit to balance the equity value decrease. References Madura, J. (2014). International financial management(12th ed.). Boston, MA: Cengage Learning. Answer: A spot contract is an immediate contract where purchase or sales made immediately for cash, it the time business transaction is made that is the time 0. Both future and forward agreement are entered at time 0 buyer and seller for the exchange of underlying asset at a future date for a specific price and at a particu Future contracts are standardized and are traded on an exchange, while a forward contract are not stand they are OTC contracts. Counterparty risk is higher for a forward contract when compared to a future c Mark to market is available in the futures contract, unlike forwarding contract. In most of the cases, pro delivered in a forward contract, unlike future contract. References Madura, J. (2014). International financial management(12th ed.). Boston, MA: Cengage Learning. mediately for cash, it the time when the greement are entered at time 0 between the specific price and at a particular time. orward contract are not standardized, and when compared to a future contract. tract. In most of the cases, products are MA: Cengage Learning. Answer: a) Interest plus principal expense on six-month CD = Principal of Swedish bond = Interest and principle = Interest and principle in dollars if hedged = Spread = b) Net interest income should be = 5000 Interest income = $1,037,500 Forward rate = SK5,763,888.89/$1,037,500 = $1,032,500 5,555,555.56 SK 5,763,888.89 SK 1,043,263.89 0.010764 $0.18 /SKr In order for the spread to remain at 1% per year theforward and Spot must be same. Answers: a) b) c) d) e) Contracts are necessary to fully hedge the bank = 377.06 Contracts For an increase in rates of 100 basis points change in the cash balance sheet position is as follows: Expected E = -$3,272,727.27 Change in bond value = -$8,797.51 Change in 377 contracts = -$3,316,662.06 Stock could be repurchased for a gain = $3,316,662.06 The difference between the two values is a net gain = $43,934.79 For an increase in rates of 50 basis points change in the cash balance sheet position is as follows: Expected E = $1,636,363.64 Change in bond value = $4,398.76 Change in 377 contracts = $1,658,331.03 Stock could be repurchased for a gain = -$1,658,331.03 The difference between the two values is a net loss = -$21,967.39 (or) $21,967.39 Contracts are necessary to fully hedge the balance sheet = 1469.39 Contracts When there is a requirement for more number of Treasury bonds for hedging the balance sheet items using macrohedge, the finanical institution should consider about the number of Treasury bonds deliverables held or available for them. Even though there is a higher requirement for Treasury bill contract for hedging balance sheet than the Treasury bonds, the fact is that Treasury bill market has more depth and number of deliverables are lesser. References Madura, J. (2014). International financial management(12th ed.). Boston, MA: Cengage Learning. Loss ance sheet items asury bonds r Treasury bill bill market has Answer: a) b) c) If the bank sells with recourse, it should expect = $9.8723 millions If the bank sells without recourse, it should expect = $9.8093 millions If the bank expects a 0.5 percent probability of default on this loan it should expect to receive = $9.8229 With the 0.5% of probability of default the expected value is still higher than selling it without recourse. Hence the bank must sell with recourse. References Madura, J. (2014). International financial management(12th ed.). Boston, MA: Cengage Learning. e Learning. Answer: a) b) The duration of the existing loan Incase of purchasing $5 million in loans with an avg. duration of 7 years, its portfolio duration would increase to = = = = 0+$15,000,000/$20,000,000(X) = 3.5 years $15,000,000 = 70000000 X X= 4.6667 Years 5.25 Years From the above calucltaion it is clear that if FI purchaes $5 million loan then its duartion is 5.25 years which is more than the average duration of asset 5 years. Hence FI must consider other loan with a lesser duartion. The FI should seek to purchase a loan of the following duration = $5m/$20m(X) + $15m/$20m(4.667 years) = 5 years $5m/$20m(X) + 3.5 = 5 Years $5m/$20m(X) = 1.5 $5m = 30 X X= 6 Years