1) A bank's core business is credit lending. The following risk and return numbers are given for the last year.
|
|
Risk
|
Return
|
|
Credit
|
10
|
5
|
|
Market
|
10
|
3
|
|
Risk from internal processes (process risk)
|
10
|
0
|
a. If credit lending is core, how can the bank document the risk on the competence level?
b. It turns out that the process risk solely comes from losses in the credit administration process (e.g. credit processing is too slow, too many errors). Considering this additional risk, should the bank still offer credit lending?
2) A corporate has a loan with 5 years maturity and a floating interest rate. The treasurer - just finished his Master of Science program - expects the interest rate to decrease in the next year from the current level of 5 % p.a. to a level of 3 %. The risk manager observes a high interest rate volatility of 150 basis points (=1.5 %) p.a. Assume that interest rate changes are normal and that it does not cost any money to change the nature of the loan from floating interest payments to fixed interest payments of 5 %. Please give short answers.
a. The company's main objective is to minimize cash flow risk. Explain what the company should do.
b. The company's main objective is to minimize market value risk. Explain what the company should do.