1. Discuss why there is an add on amount for derivative transactions in Basel I. [3]
2. Under what circumstances is it possible to make a European option on a stock index
both gamma neutral and vega neutral by adding a position in one other European
option? [5]
3. Estimate the capital required under Basel I for a bank that has the following transactions
with another bank. Assume no netting.
a. A two-year forward contract on a foreign currency, currently worth $2 million,
to buy foreign currency worth $50 million [2]
b. A long position in a six-month option on the S&P 500. The principal is $20
million and the current value is $4 million. [2]
c. A two-year swap involving oil. The principal is $30 million and the current
value of the swap is –$5 million. [2]
d. What difference does it make if the netting amendment applies? [2]
4. Explain ways that the Dodd–Frank Act is in conflict with:
a. The Basel international regulations; and [2]
b. The regulations introduced by our South African government [2]
5. A company has a position in bonds worth $6 million. The modified duration of the
portfolio is 5.2 years. Assume that only parallel shifts in the yield curve can take place
and that the standard deviation of the daily yield change (when yield is measured in
percent) is 0.09. Carefully explain the weaknesses of this approach to calculating VaR.
Explain two alternatives that give more accuracy. [5]
6. The arguments on whether capital should be regulated have made regulation on banks’
capital adequacy a topic of controversy.
capital? [10]