MN-3507: Risk Management in Banking 2023

发布时间：2024-05-10

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DEGREE EXAMINATIONS: MAY/JUNE 2023

SCHOOL OF MANAGEMENT

MN-3507: Risk Management in Banking

Section A

Question 1

Bank of Victoria has a trading division that comprises of three trading desks, namely fixed- income, foreign exchange (FX) and equity trading. As of today, the trading division has the following information to be presented to its management team:

	Trading desk 1 Fixed-income Trading	Trading desk 2 FX Trading	Trading desk 3 Equity Trading
Exposure USD	400	500	600
Return volatility	0.40%	1.60%	1.80%
Correlation with TD1	1	-0.04	0.03
Correlation with TD2	-0.04	1	0.25
Correlation with TD3	0.03	0.25	1

a) Please provide today’s daily value-at-risk (VaR) of the entire trading division, if the confidence level is set at 99%. [5 marks]

b) Please illustrate numerically which desk contributes the most VaR towards the entire division’s VaR. Please explain why this is the case. The confidence level remains at 99%. [10 marks]

[Total: 15 marks]

Question 2

Bank of Rossa faces a potential bank run. To avoid such disastrous situation, it has decided to liquidate some of its assets, which include gold, silver and bitcoins. As of today, these three instruments have the following information:

Instrument	Gold	Silver	Bitcoin
Quantity	0.2 mil (ounce)	5 mil (ounce)	200 (coin)
Bid price USD$	1815 per ounce	15 per ounce	19500 per coin
Offer price USD$	1817 per ounce	15.1 per ounce	19600 per coin
Mid-market price USD$	1816 per ounce	15.05 per ounce	19550 per coin
Mean of bid-offer spread	0.002	0.0014	0.01
Standard deviation of bid-offer spread	0.008	0.004	0.6

a) Fortunately, the market condition today is normal. Please calculate the cost of liquidation of all three instruments if the bank wishes to go ahead with the operation. [5 marks]

b) Assume that the regulator is concerned with the situation in the bank and sends examiners to visit the bank today. Please provide them with the information on the cost of liquidation if the market was instead stressed and the bank had to carry out a ‘fire sale’ of all three instruments. The confidence level is set at 99%. [5 marks]

[Total: 10 marks]

Section B

Question 1

As far as the last global financial crisis (2008-2009) is concerned, some systemically important financial institutions experienced severe liquidity problems at the height of the crisis. Please use at least two examples to discuss this statement. [25 marks]

Question 2

One of the largest US insurance companies, AIG, nearly failed in the last financial crisis due to its trading activities involving credit default swaps (CDS). Please explain what a CDS is and how it is, in theory, used to manage risks. [25 marks]

Question 3

With the help of a graph, please explain the framework to estimate the amount of economic capital a bank needs against its credit risk. [25 marks]

Question 4

Against the backdrop of increasing impact of human activities on environment and climate, banks are now facing new challenges and risks. Explain how banks measure and mitigate their risks in these areas. [25 marks]

Question 5

Advanced Measurement Approach is one of the approaches recommended by the Basel Committee to measure banks’ operational risk. Please explain the implementation of such approach in banks. [25 marks]