Cass Undergraduate School
BSc (Hons) Degree in Actuarial Science
BSc (Hons) Degree in Accounting and Finance
BSc (Hons) Degree in Investment & Financial
Risk Management
FR3102
Asset-Liability Management
Stage 3 Examination
January 2020
2hrs 15mins
Instructions to students:
Answer ANY THREE of the FOUR questions.
All questions carry equal marks.
This examination paper consists of 5 printed pages including the title page.
Materials:
Number of answer books to be provided: 1
Only the Casio calculators FX-83 (MS, ES or GT+ or GTX) or FX-85 (MS, ES or GT+ or
GTX) are permitted for use in this exam
Dictionaries are not permitted.
This examination paper MAY be removed from the examination room.
External Examiner: Dr Charalampos Stasinakis
Internal Examiner: Dr Sotiris K. Staikouras
Page 1 of 5
Answer ANY THREE of the FOUR questions.
Question 1
Sunrise Bank has year-end data for the most recent period as follows:
Return on Assets (ROA)
0.99%
Return on Net-Worth (RONW)
12.57%
Net income
£11,798,000
a) Calculate the bank’s net worth multiplier.
(15 marks)
b) Calculate the bank’s net worth to total assets ratio.
(15 marks)
c) Calculate the bank’s total assets and net worth.
(25 marks)
d) Suppose that the bank increases total liabilities by £10 million and reduces net worth by
the same amount. Assuming no change in net income, what will be the new net-worth
multiplier and RONW ratios?
(30 marks)
e) What do the results in part (d) indicate?
(15 marks)
Page 2 of 5
Question 2
a) Briefly discuss what is the special role(s) that financial intermediaries play in the financial
system and why are they singled out for special regulatory attention?
(35 marks)
b) Briefly discuss the liquidity risk exposure of financial institutions.
(10 marks)
c) Briefly discuss what we mean by an integrated financial policy when it comes to the
(proper) management of financial intermediaries.
(25 marks)
d) Given the GAP report below, please calculate a) the GAP of this institution, b) the
cumulative GAP ratio, c) the fraction of the year over which repricing applies, d) the
interest cash flow generated by each exposure, assuming a 200 basis points increase in
yields and e) the cumulative interest cash flow generated over the entire period (i.e. 360
days). What does the number obtained under question (e) indicate?
(30 marks)
GAP REPORT ($ millions)
RSA
Overnig
< 30
< 60
< 90
< 180
< 270
< 360
days
days
days
days
days
days
ht
T-bills
5
10
10
10
10
10
10
CDs
-
-
20
-
-
-
-
10
-
-
-
-
-
-
CP
-
30
-
50
-
-
-
Loans
-
-
50
-
60
-
20
Notes
-
-
-
-
-
-
50
Securitie
s
RSL
RSA: Rate sensitive assets, RSL: Rate sensitive liabilities.
Page 3 of 5
Question 3
a) Briefly state the importance of measuring credit risk.
(10 marks)
b) Briefly state the impact of credit quality problems on financial institutions.
(10 marks)
c) The losses in excess of total capital for the commercial, residential and real estate sectors
are 6.235%, 6.325% and 6.135% respectively. In one of these industries the bank has
set 55% concentration limits, on loans to individual firms, where the average historical
losses are 11.5%. Identify which industry the bank is prepared to lend.
(10 marks)
d) Briefly describe the credit forward contracts. What is the maximum loss for the seller?
What does the maximum loss mirror? What if the default risk remains the same? What
if the characteristics of the benchmark bond (credit spread, modified duration, principal
value etc.) are the same as those of the loan? Making a loan is similar to writing a put
option. If not true, explain why.
(40 marks)
e) Describe the process of simple and double credit securitisation.
(30 marks)
Page 4 of 5
Question 4
a) Interpret the following statement, made by a trader, by considering what could happen
over the next 20 trading days: “The daily VAR of a bank’s trading book market risk is $2
million at the 95% level”.
(10 marks)
b) The collapse of Barings – personal bank to HM The Queen – in 1995 and Nick Leeson's
role in it is the most spectacular financial debacle of the 20th century. Nick Leeson’s total
loss was reported at $1.3bn (Feb. 1995). Nick Leeson was short in Japanese government
bond futures and long in Nikkei futures (among other positions), which had negative
correlation. In the aftermath of the turmoil, a trader commented in Financial Times
(1/3/95): “This does not work as a hedge. It would have to be the other way round”. What
is this trader trying to say?
(10 marks)
c) Consider a 3-year deep discount bond with a nominal value of $10,000. The current 3year yield is 3.26%. Assume the mean daily yield change is 5 basis points and yield
changes are normally distributed with a daily volatility of 0.09%. Using the Risk Metrics
framework, calculate the 95% and 99% bond VAR over a 10-day horizon, as well as the
95% bond VAR over a 20-day horizon (round all VAR figures to the nearest integer).
(40 marks)
d) Star Bank has estimated that its average VAR over the last 60 days was £35.5 million.
The DEAR of the previous day was £30.2 million. Under the BIS standards:
i. Determine the amount of capital to be held for market risk.
(10 marks)
ii. The bank has £15 million of Tier 1 capital, £37.5 million of Tier 2 capital and £54 million
of Tier 3 capital. Is the capital sufficient? If not, what minimum amount and type of
new capital should be raised? (Note that capital can be raised from any type subject
to Tier 3 capital is limited to 250% of Tier 1 and Tier 2 can be substituted for Tier 3 up
to the same 250% limit.)
(30 marks)
************
Page 5 of 5