Archives: Solution Manual
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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 […]
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 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 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 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 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 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 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 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 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 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 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 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 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 […]
978-1118808948 Chapter 17 Solution Manual
Answers to Back-of-the-Chapter Problems 1. a. Each buyer should bid bi = vi. If the buyer bids above her value, it makes a difference only when she outbids an opponent who bids bj > vi, in which case she obtains […]
978-1118808948 Chapter 17 Lecture Note Part 2
Questions for Class Discussion 1. As a consultant for a major theater chain, your task is to predict the box office gross revenues (per screen) for a given film in a given city, week by week. Describe how you would […]
978-1118808948 Chapter 17 Lecture Note Part 1
CHAPTER SEVENTEEN AUCTIONS AND COMPETITIVE BIDDING OBJECTIVES 1. To demonstrate the potential advantages of auctions compared to posted prices, on the one hand, and to unconstrained negotiation, on the other, and to show how auctions can enhance revenue. 2. To […]
978-1118808948 Chapter 16 Solution Manual
Answers to Back-of-the-Chapter Problems 1. a. Increasing or decreasing returns to scale implies that either the objective b. The LP method can handle any number of decision variables. The earlier problem of producing a maximum level of output contained more […]
978-1118808948 Chapter 16 Lecture Note
CHAPTER SIXTEEN LINEAR PROGRAMMING OBJECTIVES 1. To become familiar with the types of problems that linear programming can solve. 2. To formulate LP problems. (Linear Programs) 3. To solve LP problems using graphs. (Graphing the LP Problem) 4. To relate […]
978-1118808948 Chapter 15 Solution Manual
Answers to Back-of-the-Chapter Problems 1. a. The plaintiff’s expected court receipt (net of legal costs) is 50,000 – 15,000 = $35,000. The defendant’s expected court payment (including legal costs) is 50,000 + 15,000 = $65,000. The zone of agreement lies […]
978-1118808948 Chapter 15 Lecture Note Part 3
Selling a Maine House After reading these instructions, you will participate in a negotiation exercise involving two parties, a seller (you) and a potential buyer (your bargaining partner sitting next to you). The description of the bargaining setting and information […]
978-1118808948 Chapter 15 Lecture Note Part 2
VI. Negotiation Exercises Face-to-face negotiation is an excellent vehicle for engaging students and promoting “learning by doing.” The following exercises are good examples. To conduct the exercises, the instructor should distribute buyer and seller information sheets and pair the students. […]
978-1118808948 Chapter 15 Lecture Note Part 1
CHAPTER FIFTEEN BARGAINING AND NEGOTIATION OBJECTIVES 1. To identify the economic sources of mutually beneficial agreements — namely, differences in values. 2. To assess the complications posed by multiple-issue negotiations (and to stress the value-maximization principle. (Multiple-Issue Negotiations) 3. To […]
978-1118808948 Chapter 14 Solution Manual
Answers to Back-of-the-Chapter Problems 1. a. We know that Pr(L) = .04, Pr(R | L) = .5, and Pr(R|N) = 1/16, where L denotes lemon, R denotes return, and N denotes normal car. The joint table is Lemon (L) Normal […]
978-1118808948 Chapter 14 Lecture Note Part 2
D. A Supply Contract. (An expanded version of Problem 7) Firm S is about to contract to deliver lumber to Firm B. Firm S estimates that under normal circumstances, it can produce and deliver the lumber at a cost of […]
978-1118808948 Chapter 14 Lecture Note Part 1
CHAPTER FOURTEEN ASYMMETRIC INFORMATION AND ORGANIZATIONAL DESIGN OBJECTIVES 1. To show the strategic implications posed by asymmetric information. (Asymmetric Information) 2. To understand the incentive conflicts (including moral hazard) inherent in the relationship between principal and agent. (Principals, Agents, and […]
978-1118808948 Chapter 13 Solution Manual Part 2
10. a. According to the decision tree, the agency should not take the case to court: b. According to the joint table, Pr(P|Q) = .15/.31 = .484 and Pr(P|C) = .05/.69 = .07. Audit Result Padding Not c. According to […]
978-1118808948 Chapter 13 Solution Manual Part 1
Answers to Back-of-the-Chapter Problems 1. As tough as it may be to do, you should ignore your friend’s story. His experience represents a single data point. You already have gathered the 2. a. The assessment is subjective in the sense […]
978-1118808948 Chapter 13 Lecture Note Part 2
II. Teaching the “Nuts and Bolts” A. General Tips. Assessing the value of information involves: 1) incorporating new information into the manager’s decision tree, and 2) revising probabilities using joint probability tables or Bayes rule. We place at least as […]
978-1118808948 Chapter 13 Lecture Note Part 1
CHAPTER THIRTEEN THE VALUE OF INFORMATION OBJECTIVES 1. To show how to incorporate new information into the manager’s decision tree. (The Value of Information) 2. To show how to revise probabilities using joint probability tables and Bayes rule. (Revising Probabilities) […]
978-1118808948 Chapter 12 Solution Manual
Answers to Back-of-the-Chapter Problems 1. a. The expected values at points E, D, C, B, and A in the decision tree are b. The manager is confused. Point D is a point of decision: The manager simply should select the […]
978-1118808948 Chapter 12 Lecture Note Part 3
Key West Fisheries Teaching Note A decision tree describing Harry Morgan’s basic problem is shown below. If Morgan rejects the contract, his monetary position at the end of the year depends on the price of tuna and the size of […]
978-1118808948 Chapter 12 Lecture Note Part 2
ADDITIONAL MATERIALS I. Short Readings D. Gilbert and J. Scheck, “Big Oil Companies Struggle to Justify Soaring Project Costs,” The Wall Street Journal, January 29, 2014, p. A1. “What are the Top Five Risks the World Faces in 2014?” Knowledge@Wharton, […]
978-1118808948 Chapter 12 Lecture Note Part 1
CHAPTER TWELVE DECISION MAKING UNDER UNCERTAINTY OBJECTIVES 1. To review the notions of uncertainty, probability, and expected value. (Uncertainty Probability and Expected Value) 2. To show how to draw decision trees and average them back. (Decision Trees) 3. To explore […]