acfi3008

As given below


Explanation:
Part - a

Calculating price volatality

Price volatality = [D / (1+R)] * Potential adverse move in yield

Where as D (duration) = 5 years

R (YTM) = 6.5%

Potential adverse move in yield at 5% (Z0.05 = 1.645) = 1.645 * 0.0032

Potential adverse move in yield at 5% = 0.005264

Now Price volatality = [5/(1.065)] * 0.005264

Now Price volatality = 0.0247 or 2.47%

Calculating The daily earnings at risk for this bond (DEAR) = ($ value of the position) * Price volatility

Given value of position in question is $ 1 million

=$1,000,000 * 0.0247

DEAR (Fixed income securities) = $ 247,000

Part - b

DEAR = Dollar equivalent value of € position * Fx volatility

Calculating Fx volatility

Fx volatility = 1.645 * Base points

= 1.645 * 75.5

= 124.1975 or 1.241975%

Calculating Dollar equivalent value of € position

Dollar value of € position = FX position * $ per unit of foreign currency

Dollar value of € position = €3,000,000 * $1.05 per €

= $ 3,150,000

Calculating The daily earnings at risk (DEAR)

DEAR =Dollar equivalent value of € position * Fx volatility

DEAR =  $ 3,150,000 * 1.241975%

DEAR = $ 39,122

Therefore, the Daily Earnings at Risk for the fixed-income securities component is $5,264 and the DEAR for foreign exchange contracts is €37,259.25.


Explanation:
Let's calculate the DEAR for each component of the portfolio using the formula:



DEAR = Portfolio Value × Z-Score × Standard Deviation



where:

Portfolio Value is the value of the specific component in the portfolio.
Z-Score corresponds to the desired confidence level (90% confidence limit is approximately 1.645).
Standard Deviation is the historical standard deviation of the component's returns.


Fixed-income securities:



Z-score for 90% confidence level = 1.645 (from standard normal distribution)

Portfolio Value = $1,000,000

Volatility = 32 basis points = 0.32%

DEAR = 1.645 * $1,000,000 * 0.32% = $5,264





Foreign exchange contracts:



Z-score for 90% confidence level = 1.645 (from standard normal distribution)

Portfolio Value = €3,000,000

Volatility = 75.5 basis points = 0.755%

DEAR = 1.645 * €3,000,000 * 0.755% = €37,259.25

The balance sheet ofA. G. Fredwards, a government security dealer, is listed below. Market yields are in parentheses and amounts are inmillions.
Assets
Liabilities and Equity
Cash
$20Overnight repos
$340
1-month T-bills (7.05%)3-month T-bills (7.25%2-year T-notes (7.50%)8-year T-notes (8.96%)
150Subordinated debt
1507-year fxed rate (8.55%)300
100200
5-year municipal bond (floating rate)
(8.20% reset every 6 months)50Equity
3
$670Total liabilities and equity$670
Total assets
(i) What is the repricing gap if the planning period is 6 months? 1 year? (2 marksm What is the impact over the next two vears on net interest income ifinterest rates on rate sensifive assets (RSA) increased by 60 basispoints and on rate sensitive liabilities (RSL) increased by 70 basis points? (2 marks)
b) An Fl wants to evaluate the credit risk of a $5 milion loan with a duration of 5 years to a AAA borrower,. There are currently 500 publiclyraded bonds in that class lie. bonds issued by frms with a AAA rating,. The curent average level of rates R) on AAA bonds is 9 percent.The largest increase in credit risk premiums on AAA loans, the 99 percent worst-case scenaro, over the last year was equal to 1.5 percent'e.only 6 bonds out of 500 had risk premium increases exceeding the 99 percent worst case. The proierted lone-vear snread on the oais 0.5 percent and the Fl charges 0.35 percent of the face value of the loan in fees. Calculate the capital at risk and the risk adiusted returnon capita

The total amount of money you owe to creditors is your liability. Proprietor's value, total assets, or capital is the all out worth of resources that you own less your absolute liabilities. To put it another way, assets are the sum of the owner's equity and liabilities.

You can figure it out by subtracting an asset's total value from all of its liabilities: Assets minus liabilities is equity). The total value of the company's equity in accounting is the sum of the owners' equity the value of the assets contributed by the owner or owners and the company's total income.

The two halves should always be equal because liabilities and equity are used to pay for assets. A straightforward explanation of the above idea can be found in the balance sheet equation.







References:

https://www.alvordschools.org/site/handlers/filedownload.ashx?moduleinstanceid=21083&dataid=33142&FileName=ch.21.pdf



https://fundbox.com/blog/assets-liabilities-equity/#:~:text=You%20can%20calculate%20it%20by,the%20company%20earns%20and%20retains.



https://gocardless.com/en-au/guides/posts/why-does-a-balance-sheet-need-to-balance/#:~:text=Because%20assets%20are%20funded%20through,halves%20should%20always%20be%20balanced.&text=The%20balance%20sheet%20equation%20provides%20a%20simple%20breakdown%20of%20the%20concept%20above.


Explanation:
Because they provide students with a variety of sources from which to learn, the references may provide students with the necessary information and help them develop a deeper understanding of the subject.

)

A financial ratio used to evaluate a company's financial standing is the Altman Z-score. It is a statistical model that determines the likelihood of bankruptcy using financial ratios. The likelihood of bankruptcy is reduced the higher the Z-score.

An AA-rated loan has an Altman Z-score of 3.3. The loan applicant's Z-score is determined as follows:

Z = 1.2 * Working Capital/Total Assets + 1.4 * Retained Earnings/Total Assets + 3.3 * EBITDA/Total Assets + 0.6 * Market Value of Equity/Total Liabilities

= 1.2 * 40 / 1470 + 1.4 * 200 / 1470 + 3.3 * 400 / 1470 + 0.6 * 1500 / 1470 = 0.272 + 0.134 + 1.913 + 0.714 = 3.329

As a result, the loan applicant's Z-score is 3.329. This is just above the 3.3 requirement for the AA rating, thus the loan would probably be authorized.





b)

The liquidity index gauges a financial institution's capacity to fulfill its immediate obligations. The ratio of liquid assets to total liabilities is used to calculate it. Assets that can be quickly changed into cash are known as liquid assets; examples include cash reserves, T-notes, and mortgage loans.

The following formula is used to compute the DI's liquidity index:

Liquidity Index = (Cash Reserves + T-notes + 0.9 * Mortgage Loans) / Total Liabilities = (25 + 30 + 0.9 * 40) / 65 = 38.57
Therefore, 38.57 is the DI's liquidity index. Given that this index has a high level of liquidity, the DI is in a good position to fulfill its immediate obligations.


Explanation:
Reference

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=2ahUKEwiK1rb6pdH_AhWj8zgGHSxGCl0QFnoECBcQAQ&url=