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Faculty of Business and Law

Assignment Brief Mode E and R Regulations

6011FIN_2223JANMAY Risk Management in Banking

Questions:

Total Questions = 10; Marks of Each Question = 10; Total Marks = 100

Question 1:

What are the problems associated with the Linear Discriminant Analysis (Altman’s Z Score). Please explain your answer.             (10 marks)

Question 2:

Please define the “Interest Rate Parity Theorem” and explain the equation which describes it.      (10 marks)

Question 3:

Which aspect of the price sensitivity of a bond is only captured by Convexity but is not captured by Duration of a bond? Please explain your answer            (10 marks)

Question 4:

Comparing Value at Risk (VAR) and Expected Shortfall (ES), which is preferred by regulators for measurement of market risk and why? Please explain your answer.  (10 marks)

Question 5:

Please define and explain Loan Migration Matrix. Why banks use Loan Migration Matrix?     (10 marks)

Question 6:

What is the risk (standard deviation of returns) on the below portfolio of bank loans (A, B & C), if loan returns are uncorrelated (ρ = 0)? (Hint: Correlation between A & B = 0; Correlation between B & C = 0 and Correlation between C & A = 0)                     (10 marks)

Question 7:

What is the duration of a five-year, $1,000 Treasury bond with a 10 percent semiannual coupon selling at par with a yield to maturity (YTM) of 14%?             (10 marks)

Question 8:

Consider the following balance sheet for ABC Bank (figures in millions):

Assets Liabilities and Equity

Variable-rate mortgages 1-year fixed deposits

(interest-rate 10% annually) $50 (interest-rate 6% annually) $70

30-year fixed-rate loans 3-year fixed deposits

(interest-rate 7% annually) $50 (interest-rate 7% annually) $20

Equity $10

Total assets $100 Total liabilities & equity $100

What is the expected net interest income after 1 year, if interest rates on Rate Sensitive Assets (RSAs) increase by 2 percent but interest rates on Rate Sensitive Liabilities (RSLs) increase by 1 percent?           (10 marks)

Question 9:

A bond with a par value of $150,000 pays 8 percent annual interest and has a Macauley duration of 8.19 years. If interest rates rise by 3.2 percent, calculate the bond's new price. Please remember that the bond pays interest annually.           (10 marks)

Question 10:

ABC Bank has been borrowing in the U.S. markets and lending abroad, thus incurring foreign exchange risk. In a recent transaction, it issued a one-year, $1.5 million certificate of deposit (CD) at 5 percent annual interest and gave out a loan in euros at 9 percent, using the proceeds from the certificate of deposit. The spot rate for the euro was €1.19/$1 (1.19 euros per US dollar) at the time of the transaction.

Information received immediately after the transaction indicated that the euro for dollar exchange rate will change to €1.16/$1 (1.16 euros per US dollar) by the end of year. If the information is correct, what will be the net return in US dollars on the loan after 1 year, inclusive of the principal amount?                (10 marks)

Criteria for Assessment

As mentioned on the first page.

How to submit your assessment

The assessment must be submitted within 68 minutes (11.00am to 12:08am), after the test starts on 9^th Mar 2023. No paper copies are required. You can access the submission link through Aula.

· Your coursework will be given a zero mark if you do not submit a copy through Turnitin. Please take care to ensure that you have fully submitted your work.

· Please ensure that you have submitted your work using the correct file format, unreadable files will receive a mark of zero. The faculty accepts Microsoft Office and PDF documents, unless otherwise advised by the module leader.

· All work submitted after the submission deadline without a valid and approved reason (see below) will be given a mark of zero.

· The University wants you to do your best. However, we know that sometimes events happen which mean that you can’t submit your coursework by the deadline – these events should be beyond your control and not easy to predict.  If this happens, you can apply for an extension to your deadline for up to two weeks, or if you need longer, you can apply for a deferral, which takes you to the next assessment period (for example, to the resit period following the main Assessment Boards). You must apply before the deadline.

You will find information about the process and what is or is not considered to be an event beyond your control at https://share.coventry.ac.uk/students/Registry/Pages/Deferrals-and-Extension.aspx

· Students MUST keep a copy and/or an electronic file of their assignment.

· Checks will be made on your work using anti-plagiarism software and approved plagiarism checking websites.

GUIDELINES AND BACKGROUND TO THIS ASSIGNMENT

Plagiarism

As part of your study, you will be involved in carrying out research and using this when writing up your coursework. It is important that you correctly acknowledge someone else’s writing, thoughts, or ideas and that you do not attempt to pass this off as your own work.  Doing so is known as plagiarism.  It is not acceptable to copy from another source without acknowledging that it is someone else’s writing or thinking. This includes using paraphrasing as well as direct quotations. You are expected to correctly cite and reference the works of others. The Centre for Academic Writing provides documents to help you get this right. If you are unsure, please visit www.coventry.ac.uk/caw.  You can also check your understanding of academic conduct by completing the Good Academic Practice quiz available on Aula.

Self-plagiarism or reuse of work previously submitted

You must not submit work for assessment that you have already submitted (partially or in full), either for your current course or for another qualification of this and any other university, unless this is specifically provided for in your assignment brief or specific course or module information. Where earlier work by you is citable, i.e. it has already been published/submitted, you must reference it clearly. Identical pieces of work submitted concurrently will also be considered to be self-plagiarism. Self-plagiarism is unacceptable because you cannot gain credit for the same work twice.

Aula includes a plagiarism detection system and assessors are experienced enough to recognise plagiarism when it occurs. Copying another student’s work, using previous work of your own or copying large sections from a book or the internet are examples of plagiarism and carry serious consequences. Please familiarise yourself with the CU Harvard Reference Style (on Aula) and use it correctly to avoid a case of plagiarism or cheating being brought.  Again, if you are unsure, please contact the Centre for Academic Writing, your Progress Coach or a member of the course team.

Return of Marked Work

You can expect to have marked work returned to you within 15 working days. If for any reason, there is a delay you will be kept informed. Marks and feedback will be provided online. As always, marks will have been internally moderated only, and will therefore be provisional; your mark will be formally agreed later in the year once the external examiner has completed his / her review.