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FIN20013 Banking Operations And Governance

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Question 1
a.What is repricing gap? In using this model to evaluate interest rate risk, what is meant by rate sensitivity?
b.What are the main differences between the assets, liabilities and income of a commercial bank and a life insurance company? Why such differences exist?
c.How do loan portfolio risks differ from individual loan risks? How is this different from “loan concentration risk”?
d.How do revolving loans differ from non-revolving loans?
Question 2
a.List two factors explain the growth of financial institutions (FIs) off balance sheet activities.
b.What is meant by when-issued trading? Explain how forward purchase of when-issued government Treasury securities can expose FIs to contingent interest rate risk.
c.In what ways do Financial Institutions (FIs) exposed to drawdown risk and aggregate funding risk? How are these two contingent risks related?
Question 3
a.List and discuss two requirements of using futures contracts to hedge risk.
b.What is a letter of credit? Explain how is a letter of credit like an insurance contract?
c.In each of the following cases, indicate whether it would be appropriate for an FI to buy or sell forward contract to hedge the appropriate interest risk
•An insurance company plans to sell 6 months bank bill in three months’ time
•A finance company has an asset with duration of 13 years and liabilities with duration of 7 years.
Question 4
a.How do depository institutions assist in the implementation and transmission of monetary policy?
b.How has technology altered the competition risk of FIs?
c.How do liquid asset reserve requirements enhance the implementation of monetary policy?
Question 5
a.Outline the main features of exchange settlement accounts and identify the safety valves used by RBA to assist Deposit Taking Institutions (DIs) to maintain their exchange settlement accounts
b.What are the ways in which deposit institutions can offset the effects of asset side liability risk as such the drawing down of a loan commitment?
c.What are the costs and benefits to a financial institution of holding large amount of liquid assets? Why Treasury securities are considered good examples of liquid assets?
Question 6
a.Does the interest rate risk measured in Value-at-Risk (VaR) capture the same activities of the bank, as the maturity gap or the repricing gap do? Besides interest rate risk, what other risks do VAR measures?
b.One of approaches commonly used in the estimation of VaR is the back simulation.
Discuss some of the shortcomings in the estimation of this approach.
c.What conditions were introduced by Bank of International Settlements (BIS) to allow large banks to use internally generated models for the measurement of market risk? What types of capital can be held to meet the capital charge requirements?
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