Assignment
1. Suppose that Florida Bank has recently granted a loan of $2 million to Oyster Farms at LIBOR plus 0.5 percent for six months. In return for granting Oyster Farms an interest- rate cap of 6.5 percent on its loan, this bank has received from this customer a floor rate on the loan of 5 percent. Suppose that, as the loan is about to start, LIBOR declines to 4.25 percent and remains there for the duration of the loan. How much (in dollars) will Oyster Farms have to pay in total interest on this six-month loan with floor and without floor? How much in interest rebates will Oyster Farms have to pay due to the fall in LIBOR?
2. What does securitization of assets mean?
3. What kinds of assets are most amenable to the securitization process?
4. What advantages does securitization offer to the lending institutions?
5. What was the motivation for creating collateralized mortgage obligations (CMOs) and why is the creation of CMOs important for the market and/or investors?
6. What is a credit swap? For what kinds of situations was it developed?
7. Why is a credit default swap (CDS) useful?
8. What are the differences between a CDS contract and a conventional insurance contract?
9. Commercial banks have a unique ability to hedge against systematic liquidity shocks. Discuss banks' advantage in hedging liquidity risk relative to other financial institutions. [Hint: The key point would be "natural hedge against liquidity risk", so try to explain this.]
[10-12] Assess the following bank's liquidity situation:
| Reserves at Fed |
$2,800
|
Fed funds purchased
|
$3,500
|
|
Other cash
|
$0
|
Demand deposits
|
$15,000
|
|
U.S. Treasury securities
|
$1,800
|
CDs less than $250,000
|
$5,000
|
|
Loans
|
$27,000
|
Large CDs
|
$3,000
|
|
Other assets
|
$400
|
Equity
|
$5,500
|
|
|
$32,000
|
|
$32,000
|
10. Does this bank have any core deposits? If so, how much?
11. What is this bank's financing gap? Briefly interpret this number.
12. Does this bank have any purchased liquidity? If so, how much?
13. BASEL III has proposed two new liquidity measures. What are they? Explain both of them briefly in plain English.
14. BASEL I introduced risk-based capital ratios. What were the major problems with those ratios? As U.S. Congress was not satisfied with the capital standards proposed by BASEL I, the U.S. bank regulators included another capital measure. What was it?
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.