Question 56
Which of the following statements about a bank's behavior regarding Risk Adjusted Return on Capital
(RAROC) is correct?
I. A bank should always seek to maximize their overall RAROC.
II. A bank should consider investing in a business even with negative RAROC if it increases the RAROC of
the bank as a whole.
III. A bank should minimize its overall RAROC by controlling the absolute and relative amount of risk of its
businesses.
IV. A bank should maximize its RAROC by always investing in a new business that maximizes the RAROC
for that business unit.
(RAROC) is correct?
I. A bank should always seek to maximize their overall RAROC.
II. A bank should consider investing in a business even with negative RAROC if it increases the RAROC of
the bank as a whole.
III. A bank should minimize its overall RAROC by controlling the absolute and relative amount of risk of its
businesses.
IV. A bank should maximize its RAROC by always investing in a new business that maximizes the RAROC
for that business unit.
Question 57
Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year
no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate
spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both
interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta
defaults, the bank expects to lose 50% of its promised payment. Six months after Alpha Bank provides USD
$1 million loan to the Delta Industrial Machinery Corporation, a new competitor enters the machinery
industry, causing Delta to adjust its prices and mark down the value of its inventory. Hence, the probability of
default increases from 2% to 10% and the loss given default increases from 50% to 75%. If Alpha Bank can
reprice the loan, what should the new rate be?
no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate
spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both
interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta
defaults, the bank expects to lose 50% of its promised payment. Six months after Alpha Bank provides USD
$1 million loan to the Delta Industrial Machinery Corporation, a new competitor enters the machinery
industry, causing Delta to adjust its prices and mark down the value of its inventory. Hence, the probability of
default increases from 2% to 10% and the loss given default increases from 50% to 75%. If Alpha Bank can
reprice the loan, what should the new rate be?
Question 58
Gamma Bank estimates its monthly portfolio volatility at 5%.The portfolio's annual volatility is closest to
which of the following?
which of the following?
Question 59
Which one of the following is a reason for a bank to keep a commercial loan in its portfolio until maturity?
I. Commercial loans usually have attractive risk-return profile.
II. Commercial loans are difficult to sell due to non standard features.
III. Commercial loans could be used to maintain good relations with important customers.
IV. The credit risk in commercial loans is low.
I. Commercial loans usually have attractive risk-return profile.
II. Commercial loans are difficult to sell due to non standard features.
III. Commercial loans could be used to maintain good relations with important customers.
IV. The credit risk in commercial loans is low.
Question 60
John owns a bond portfolio worth $2 million with duration of 10. What positions must he take to hedge this
portfolio against a small parallel shifts in the term structure.
portfolio against a small parallel shifts in the term structure.