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978-1118955949 Chapter 1 Lecture Note
Risk Management and Financial Institutions, 4th Edition Instructor Notes Chapter 1: Introduction This chapter is little changed from Chapter 1 of the third edition. I generally spend about 1 to 1.5 hours on the material in this chapter. The purpose […]
978-1118955949 Chapter 1 Solution Manual
Chapter 1: Introduction 1.15. Suppose that one investment has a mean return of 8% and a standard deviation of return of 14%. Another investment has a mean return of 12% and a standard deviation of return of 20%. The correlation […]
978-1118955949 Chapter 10 Lecture Note
math underlying principal components analysis is in Appendix I. Software for carrying out a principal components analysis is on the author’s web site. Any of Problems 9.16 to 9.20 can be used as hand-in assignment questions. 9.17 and 9.18 can […]
978-1118955949 Chapter 10 Solution Manual Part 1
Chapter 10: Volatility 10.18. (Spreadsheet Provided) Suppose that observations on a stock price (in dollars) at the end of each of 15 consecutive days are as follows: 30.2, 32.0, 31.1, 30.1, 30.2, 30.3, 30.6, 30.9, 30.5, 31.1, 31.3, 30.8, 30.3, […]
978-1118955949 Chapter 11 Solution Manual Part 1
Chapter 11: Correlations and Copulas 11.16. Suppose that the price of Asset X at close of trading yesterday was $300 and its volatility was estimated as 1.3% per day. The price of X at the close of trading today is […]
978-1118955949 Chapter 12 Lecture Note
correlation and dependence. It explains that correlation is designed to measure one partic- ular type of dependence, namely linear dependence. The chapter explains that correlation can be monitored in the same way as volatility. Either the exponentially weighted moving average […]
978-1118955949 Chapter 12 Solution Manual
Chapter 12: Value at Risk and Expected Shortfall 12.13. Suppose that each of two investments has a 4% chance of a loss of $10 million, a 2% chance of a loss of $1 million, and a 94% chance of a […]
978-1118955949 Chapter 13 Lecture Note
This chapter is similar to Chapter 9 of the third edition, but in keeping with its growing importance there is more discussion of expected shortfall (ES). The chapter requires 2 to 3 hours of classroom time. It starts by explaining […]
978-1118955949 Chapter 13 Solution Manual
Chapter 13: The Historical Simulation and Extreme Value Theory 13.12. Suppose that a one-day 97.5% VaR is estimated as $13 million from 2,000 observations. The one-day changes are approximately normal with mean zero and standard deviation $6 million. Estimate a […]
978-1118955949 Chapter 14 Lecture Note
Problem 13.13 works well as an assignment question. Problem 13.12 can also be used as a short assignment question. Problem 13.17 is similar to Problem 13.13, but a little more difficult as it is not quite so easy for students […]
978-1118955949 Chapter 14 Solution Manual
Chapter 14: Model-Building Approach 14.16. Consider a position consisting of a $300,000 investment in gold and a $500,000 investment in silver. Suppose that the daily volatilities of these two assets are 1.8% and 1.2% respectively, and that the coefficient of […]
978-1118955949 Chapter 15 Solution Manual
Chapter 15: Basel I, Basel II and Solvency II 15.19. Why is there an add-on amount in Basel I for derivatives transactions? “Basel I could be improved if the add-on amount for a derivatives transaction depended on the value of […]
978-1118955949 Chapter 16 Lecture Note
Before getting into the details of bank regulations, I like to explain the “big picture” model used by bank regulators. This is shown in Figure 15.1. Capital is required to cover the difference between the expected loss and a “worst […]
978-1118955949 Chapter 16 Solution Manual
Chapter 16: Basel II.5, Basel III, and Other Post-Crisis Changes 16.13 Explain one way that the Dodd–Frank Act is in conflict with (a) the Basel international regulations and (b) the regulations introduced by other national governments. The Basel international regulations […]
978-1118955949 Chapter 17 Lecture Note
Dodd-Frank and similar post-crisis legislation in other countries are discussed. Dodd Frank is a particularly complicated piece of legislation. The material in the book attempts to summarize the main provisions. The main objective of the legislation is to prevent future […]
978-1118955949 Chapter 17 Solution Manual
Chapter 17: Fundamental Review of the Trading Book 17.7 (Spreadsheet provided) Suppose that an investor owns the $10 million portfolio in Table 13.1 on September 30, 2014. The values of the four indices on that day were 17,042.90, 6622.7, 4,416.24, […]
978-1118955949 Chapter 18 Solution Manual
Chapter 18: Managing Credit Risk: Margin, OTC Markets, and CCPs 18.16. A company enters into a short futures contract to sell 5,000 bushels of wheat for 250 cents per bushel. The initial margin is $3,000 and the maintenance margin is […]
978-1118955949 Chapter 19 Solution Manual
Chapter 19: Estimating Default Probabilities 19.23. (Spreadsheet Provided) Suppose a three-year corporate bond provides a coupon of 7% per year payable semiannually and has a yield of 5% (expressed with semiannual compounding). The yields for all maturities on risk-free bonds […]
978-1118955949 Chapter 2 Solution Manual
Chapter 2: Banks 2.15. Regulators calculate that DLC bank (see Section 2.2) will report a profit that is normally 2.16. Explain the moral hazard problems with deposit insurance. How can they be overcome? Deposit insurance makes depositors less concerned about […]
978-1118955949 Chapter 20 Lecture Note
data does not start until 1996 and b) I wanted to relate the real world default rates to Table 19.1. I stopped collecting credit spreads at the start of the credit crisis. If the crisis period had been included for […]
978-1118955949 Chapter 20 Solution Manual
Chapter 20: CVA and DVA 20.13. (Spreadsheet Provided) Extend Example 20.3 to calculate CVA when default can happen in the middle of each month. Assume that the default probability during the first year is 0.001667 per month and the default […]
978-1118955949 Chapter 21 Lecture Note
Problems 20.13 to 20.16 are possible assignment questions of varying difficulty. Chapter 21: Credit Value at Risk This chapter is a update to Chapter 18 of the third edition. The chapter starts by explaining what rating transitions matrices are and […]
978-1118955949 Chapter 21 Solution Manual
Chapter 21: Credit Value at Risk 21.10. Explain carefully the distinction between real-world and risk-neutral default probabilities. Which is higher? A bank enters into a credit derivative where it agrees to pay $100 at the end of one year if […]
978-1118955949 Chapter 22 Solution Manual
Chapter 22: Scenario Analysis and Stress Testing 22.10. (Spreadsheet Provided) What difference does it make to the worst-case scenario in Example 22.1 if (a) the options are American rather than European and (b) the options are barrier options that are […]
978-1118955949 Chapter 23 Solution Manual
Chapter 23: Operational Risk 23.12. Suppose that there is a 1% probability that operational risk losses of a certain type exceed $10 million. Use the power law to estimate the 99.97% worst-case operational risk loss when the _ parameter equals […]
978-1118955949 Chapter 24 Solution Manual
Chapter 24: Liquidity Risk 24.13. Discuss whether hedge funds are good or bad for the liquidity of markets. As discussed in the chapter, the major source of liquidity risk is liquidity black holes where most market participants want to be […]
978-1118955949 Chapter 25 Lecture Note
This chapter is an update to Chapter 21 of the third edition. Liquidity risk has become increasingly important since the crisis. The chapter considers liquidity trading risk and liquidity funding risk. The liquidity trading risk material includes a discussion of […]
978-1118955949 Chapter 25 Solution Manual
Chapter 25: Model Risk 25.13. Suppose that all options traders decide to switch from Black–Scholes to another model that makes different assumptions about the behavior of asset prices. What effect do you think this would have on (a) the pricing […]
978-1118955949 Chapter 26 Solution Manual
Chapter 26: Economic Capital and RAROC 26.10. Suppose that daily gains (losses) are normally distributed with standard deviation of $5 million. (a) Estimate the minimum regulatory capital the bank is required to hold. (Assume a multiplicative factor of 4.0.) (a) […]
978-1118955949 Chapter 27 Lecture Note
(see equation 26.3.) This is based on research by Rosenberg and Schuermann that is referenced in the text. The total economic capital for the whole bank is less than the sum of the individual economic capital amounts. Section 26.6 discusses […]
978-1118955949 Chapter 27 Solution Manual
Chapter 27: Enterprise Risk Management 27.9 (Spreadsheet Provided) Assume that in Business Snapshot 27.1, the change in the three-month Euribor rate in each quarter, is normally distributed with mean zero and a standard deviation equal to x basis points. Use […]
978-1118955949 Chapter 3 Lecture Note
IPO (see Business Snapshot 2.1). The conflicts of interest section gets students thinking about important issues that they may not have addressed in other courses. The Further Questions are straightforward and can be used in a number of differ- ent […]
978-1118955949 Chapter 3 Solution Manual Part 1
Chapter 3: Insurance Companies and Pension Funds 3.16. (Spreadsheet Provided). Use Table 3.1 to calculate the minimum premium an insurance company should charge for a $5 million three-year term life insurance contract issued to a man aged 60. Assume that […]
978-1118955949 Chapter 4 Solution Manual
Chapter 4: Mutual Funds and Hedge Funds 4.15. An investor buys 100 shares in a mutual fund on January 1, 2015, for $50 each. The fund earns dividends of $2 and $3 per share during 2015 and 2016. These are […]
978-1118955949 Chapter 5 Lecture Note
and why they have been voted the most innovative investment vehicle of the last two decades. A discussion of late trading reinforces the fact that mutual funds trade only at 4pm each day. This distinguishes them from closed-end funds and […]
978-1118955949 Chapter 5 Solution Manual
Chapter 5: Trading in Financial Markets 5.28. The current price of a stock is $94, and three-month European call options with a strike price of $95 currently sell for $4.70. An investor who feels that the price of the stock […]
978-1118955949 Chapter 6 Solution Manual
Chapter 6: The Credit Crisis of 2007 6.14. Suppose that the principal assigned to the senior, mezzanine, and equity tranches for the ABSs and ABS CDO in Figure 6.4 is 70%, 20%, and 10% instead of 75%, 20% and 5%. […]
978-1118955949 Chapter 7 Lecture Note
CDO were often only 1% wide. As the BBB tranches used to make ABS CDOs become thinner, the tranches of ABS CDOs begin to look more and more similar to each other. (See the two Business Snapshots in this chapter.) […]
978-1118955949 Chapter 7 Solution Manual
Chapter 7: Valuation and Scenario Analysis: The Risk-Neutral and Real Worlds 7.10 A stock price has an expected return of 9% and a volatility of 25%. It is currently $40. What is the probability that it will be less than […]
978-1118955949 Chapter 8 Solution Manual Part 1
Chapter 8: How Traders Manage Their Risks 8.15. The gamma and vega of a delta-neutral portfolio are 50 per $ per $ and 25 per %, respectively. Estimate what happens to the value of the portfolio when there is a […]
978-1118955949 Chapter 9 Lecture Note
in Appendices E and F at the end of the book. The Taylor Series expansions in Section 8.7 (explained in Appendix G) is an important way of thinking about the Greek letters. It has implications for some of the material […]
978-1118955949 Chapter 9 Solution Manual Part 1
Chapter 9: Interest Rate Risk 9.15. Suppose that a bank has $10 billion of one-year loans and $30 billion of five-year loans. These are financed by $35 billion of one-year deposits and $5 billion of five-year deposits. The bank has […]