QUESTION TWO A. Explain the main risks faced by banks? How do banks manage these risks? In particular, what are the techniques and models used by banks to manage risk? [10 Marks] B. Which type of risk can be eliminated by diversifying the portfolio? Which type of risk remains after a portfolio is diversified? [2 Marks] 3 C. Price discovery in the money market is an important source of decisions made by investors especially those involving their liquidity position. Evaluate the following money market instruments and make your comments on each one of them. i. Likando requires 11 percent annualized return on a 90-day Treasury bill with a K100, 000,000 par value. For much should this financial instrument be bought? [2 Marks] ii. Muke requires to pay K98, 000 for a 89-day Treasury bill with a K100, 000 par value. Calculate the annualized yield for this security. [2 Marks] iii. A three-month certificate of deposit for K100, 000 at 5.5 per cent matures in 78 days. It is currently trading at K99, 500. What is the rate of return of this certificate of deposit current offering? [2 Marks] iv. Kaluba has purchased a 30 day commercial paper with a par value of K2 million for a price of K1,990 000. What is the yield of this commercial paper investment? [2 Marks] [Total: 20 Marks]