New Bank has the following balance sheet (in millions of dollars) and has no off-balance-sheet or securitisation activities.

Assets Liabilities and equity

Cash $60 Deposits $2650

Commonwealth bonds 120 Subordinated debt 120

Residential mortgages 1800 Retained earnings 90

Business loans 1000 Common equity 120

Total assets $2980 Total liabilities and equity $2980

1)Why do exchange-traded derivative security contracts have no capital requirements,

whereas over-the-counter derivative contracts do?(2 marks)

2)What reason explains why the regulatory credit conversion factors for the risk exposure of

some contracts (eg. foreign exchange) are greater than for others (eg interest rate)?(2 marks)3)Why do regulators not want banks to act as option writers?(2marks)

3) Why are regulators more concerned with the levels of capital held by an FI compared to a non-financial institution?(2 marks)