Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit

MFIN6205 – FINANCIAL RISK MANAGEMENT FOR

FINANCIAL INSTITUTIONS

FINAL Exam – Term 1 2023

PART A

Q1 (10 marks in total)

a) Regulators have imposed multiple risk management obligations on banks. A number of these obligations were in place before the Banking Royal Commission.

What are the key reasons that banks fail to adequately comply with risk management obligations? (5 marks)

b) Explain the role of Core Principles for Effective Banking Supervision. Include in your answer how banks in Australia comply with these Principles. (5 marks)

Q2 (10 marks in total)

a) Largest financial institutions present additional risks to the financial system. What are these risks, how were they addressed in Basel II and what changes have been implemented as part of Basel III? (5 marks)

b) Historically, there have been different ways for prudential regulation of banks. The current approach is by regulating the amount of capital banks should hold. Illustrate the current model for prudential risk management and explain the role of capital in it. (5 marks)

Q3 (10 marks in total)

a) What is the objective of the VaR approach? What are some of the key problems associated with it? (5 marks)

b) In calculating capital adequacy for a bank, we apply certain deducitons from capital. Explain the nature of these deductions. (5 marks)

Q4 (10 marks in total)

a) During class, we covered the case of the collapse of Knight Capital. What were the main issues that lead to their collapse and what measures can you put in place to mitigate such risks? (5 marks)

b) In assessing market, a bank must have a policy regarding the allocation of positions to the trading book or a banking book. Explain the difference and the risks presented by an incorrect allocation (5 marks)

Q5 (10 marks in total)

a) Explain the nature and connection between interest rate risk in the banking book and liquidity risk. (5 marks)

b) What role does conduct risk play in risk management? How do regulators propose to deal with conduct risk? (5 marks)

PART B

Q1) SafeBank has the following assets:

On balance sheet

§ USD bonds issued by Australian Government (AAA) $100m

§ Non-Standard morgages (LVR = 75%, with LMI) $500m

§ Unsettled transactions $100m

§ Corporate office building $200m

Off balance sheet

§ 1Y Silver Option (with Macquarie, A/A2) $50m

§ 2Y Interest Rate swap with CBA (AA-), +$3m market value $200m

§ Bank Guarantee RIO (A-/A3) $100m

§ Bond underwriting facility (BBB) $300m

§ 1Y Undrawn Line of Credit to Telstra (A/A2) $100m

a) Using tables covered in class, calculate RWAs for these assets under Basel II [8 marks] 

b) If SafeBank securitised the morgages, but retain the obligation to cover any defaulting loans, how would the RWAs from part a) above change? [2 marks] 

Q2) You have the following balance sheet for Seriously Wounded Bank (SWB). NoThere has been market panic and uninsured depositors want to withdraw 2,000m of deposits.

a) How would SWB facilitate such a request? (2 marks)

b) Calculate the mark to market losses on the assets if they were to be sold (7 marks)

c) What would be the outcome for SWB? (1 mark)

Q3) You have the following data for a derivative portfolio:

i) What position in option 1 and the underlying asset will make the portfolio delta and gamma neutral? [2.5 marks]

ii) What position in option 1 and the underlying asset will make the portfolio delta and Vega neutral? [2.5 marks]

iii) What position in option 1, option 2, and the asset will make the portfolio delta, gamma, and Vega neutral? [5 marks]

Q4)

a) You are trying to raise $800m via securitisation of a mortgage portfolio. A benchmark loan is $800k, Loan-to-Value Ratio (LVR) is 75%, and default costs are combined $30k. You are planning a simple structure with AAA, AA, A and Equity tranches. The assumptions used by rating agencies are below. Based on the information provided, create a structure for this transaction and illustrate your calculations. [8 marks]

b) What were the key reasons securitisation failed during the GFC in the US? [2 marks]

Q5)

a) Based on the following data, complete the table below (7 marks)

b) You have a bond with modified duration of 4.5 years and market value of $500,000. If the standard deviation of interest rate is 0.01, what is the VaR for this bond? What does this number tell you? (3 marks)