The shareholders equity is extremely low for Raphael Bank because the previous CEO would like to pursue a high ratio of return on equity. However, this approach may lead to serious consequences. Now there is a new CEO and you are his advisor. Explain to him what the functions of the shareholder equity are and why it is necessary to increase shareholders equity. (6 Marks)

b. The new CEO agrees with you and ask you how to rectify the situation. Provide ways to improve the situation for Raphael Bank (5 Marks)

c. Raphael Bank has three assets. They are listed as below:

1. a 12 year bond has a yield to maturity is 8.4%, while the market value is $12,000,000. The standard deviation of this zero -coupon bond is 88 basis points.

2. Euro 1,100,000 exposure. The exchange rate is $0.8/Euro. The standard deviation is 68 basis points.

3. $1,180,000 of equity. Beta is 1 and the adverse daily movement is 86 basis points.

Correlation coefficient	bond	FX	equity
bond	1	0.3	0.7
FX	0.3	1	0.2
equity	0.7	0.2	1

Calculate the values of daily earnings at risk (DEAR) for these three assets separately by using a 5% one-tail probability (that is, the Z-value from the normal distribution table is 1.65). Then calculate the portfolio DEAR for the whole portfolio based on the correlation coefficients listed in the table (13 Marks).