金融机构风险管理练习题1

1.Whatistheprocessofassettransformationperformedbyafinancialinstitution?Whydoesthisprocessoftenleadtothecreationofinterestraterisk?Whatisinterestraterisk?AssettransformationbyanFIinvolvespurchasingprimaryassetsandissuingsecondaryassetsasasourceoffunds.TheprimarysecuritiespurchasedbytheFIoftenhavematurityandliquiditycharacteristicsthataredifferentfromthesecondarysecuritiesissuedbytheFI.Forexample,abankbuysmedium-tolong-termbondsandmakesmedium-termloanswithfundsraisedbyissuingshort-termdeposits.Interestrateriskoccursbecausethepricesandreinvestmentincomecharacteristicsoflong-termassetsreactdifferentlytochangesinmarketinterestratesthanthepricesandinterestexpensecharacteristicsofshort-termdeposits.InterestrateriskistheriskincurredbyanFIwhenthematuritiesofitsassetsandliabilitiesaremismatched.2.Thesalesliteratureofamutualfundclaimsthatthefundhasnoriskexposuresinceitinvestsexclusivelyinfederalgovernmentsecuritiesthatarefreeofdefaultrisk.Isthisclaimtrue?Explainwhyorwhynot.Althoughthefund'sassetportfolioiscomprisedofsecuritieswithnodefaultrisk,thesecuritiesareexposedtointerestraterisk.Forexample,ifinterestratesincrease,themarketvalueofthefund'sTreasurysecurityportfoliowilldecrease.Further,ifinterestratesdecrease,therealizedyieldonthesesecuritieswillbelessthantheexpectedrateofreturnbecauseofreinvestmentrisk.Ineithercase,investorswholiquidatetheirpositionsinthefundmaysellataNetAssetValue(NAV)thatislowerthanthepurchaseprice.3.Whatismarketrisk?Howdotheresultsofthisrisksurfaceintheoperatingperformanceoffinancialinstitutions?WhatactionscanbetakenbyFImanagementtominimizetheeffectsofthisrisk?MarketriskistheriskincurredfromassetsandliabilitiesinanFI’stradingbookduetochangesininterestrates,exchangerates,andotherprices.Marketriskaffectsanyfirmthattradesassetsandliabilities.Theriskcansurfacebecauseofchangesininterestrates,exchangerates,oranyotherpricesoffinancialassetsthataretradedratherthanheldonthebalancesheet.Marketriskcanbeminimizedbyusingappropriatehedgingtechniquessuchasfutures,options,andswaps,andbyimplementingcontrolsthatlimittheamountofexposuretakenbymarketmakers.4.Whatiscreditrisk?WhichtypesofFIsaremoresusceptibletothistypeofrisk?Why?CreditriskistheriskthatpromisedcashflowsfromloansandsecuritiesheldbyFIsmaynotbepaidinfull.FIsthatlendmoneyforlongperiodsoftime,whetherasloansorbybuyingbonds,aremoresusceptibletothisriskthanthoseFIsthathaveshortinvestmenthorizons.Forexample,lifeinsurancecompaniesanddepositoryinstitutionsgenerallymustwaitalongertimeforreturnstoberealizedthanmoneymarketmutualfundsandproperty-casualtyinsurancecompanies.5.Whatisforeignexchangerisk?WhatdoesitmeanforanFItobenetlonginforeignassets?WhatdoesitmeanforanFItobenetshortinforeignassets?Ineachcase,whatmusthappentotheforeignexchangeratetocausetheFItosufferlosses?ForeignexchangeriskistheriskthatexchangeratechangescanaffectthevalueofanFI’sassetsandliabilitiesdenominatedinnon-domesticcurrencies.AnFIisnetlonginforeignassetswhentheforeigncurrency-denominatedassetsexceedtheforeigncurrencydenominatedliabilities.Inthiscase,anFIwillsufferpotentiallossesifthedomesticcurrencystrengthensrelativetotheforeigncurrencywhenrepaymentoftheassetswilloccurintheforeigncurrency.AnFIisnetshortinforeignassetswhentheforeigncurrency-denominatedliabilitiesexceedtheforeigncurrencydenominatedassets.Inthiscase,anFIwillsufferpotentiallossesifthedomesticcurrencyweakensrelativetotheforeigncurrencywhenrepaymentoftheliabilitieswilloccurinthedomesticcurrency.6.Whatistherepricinggap?Inusingthismodeltoevaluateinterestraterisk,whatismeantbyratesensitivity?Onwhatfinancialperformancevariabledoestherepricingmodelfocus?Explain.Therepricinggapisameasureofthedifferencebetweenthedollarvalueofassetsthatwillrepriceandthedollarvalueofliabilitiesthatwillrepricewithinaspecifictimeperiod,whererepricemeansthepotentialtoreceiveanewinterestrate.Ratesensitivityrepresentsthetimeintervalwhererepricingcanoccur.Themodelfocusesonthepotentialchangesinthenetinterestincomevariable.Ineffect,ifinterestrateschange,interestincomeandinterestexpensewillchangeasthevariousassetsandliabilitiesarerepriced,thatis,receivenewinterestrates.7.UsethefollowinginformationaboutahypotheticalgovernmentsecuritydealernamedM.P.Jorgan.Marketyieldsareinparenthesis,andamountsareinmillions.8.11AssetsLiabilitiesandEquityCash$10OvernightRepos$1701monthT-bills(7.05%)75Subordinateddebt3monthT-bills(7.25%)757-yearfixedrate(8.55%1502yearT-notes(7.50%)508yearT-notes(8.96%)1005yearmunis(floatingrate)(8.20%resetevery6months)25Equity15TotalAssets$335TotalLiabilities&Equity$335a.Whatisthefundingorrepricinggapiftheplanningperiodis30days?91days?2years?Recallthatcashisanoninterest-earningasset.Fundingorrepricinggapusinga30-dayplanningperiod=75-170=-$95million.Fundinggapusinga91-dayplanningperiod=(75+75)-170=-$20million.Fundinggapusingatwo-yearplanningperiod=(75+75+50+25)-170=+$55million.b.Whatistheimpactoverthenext30daysonnetinterestincomeifallinterestratesrise50basispoints?Decrease75basispoints?Netinterestincomewilldeclineby$475,000.NII=FG(R)=-95(.005)=$0.47