You advise your parents on investing in financial markets and do some preparation work. Your parents are
Question:
You advise your parents on investing in financial markets and do some preparation work. Your parents are interested in buying banking stocks and want to know more about the risk that a bank goes bankrupt. You are reviewing the capital of one Singaporean bank and one international bank.
You note that the regulatory target on the total capital ratio is well above the 8% Cooke ratio prescribed by the Basel Committee.
(a) Explain what additional items may be included in the total capital regulatory target of the two banks.
(b) Compare the capital adequacy and capital efficiency of the two banks.
Your father mentions the Liquidity Coverage Ratio or LCR. The LCR of the Singaporean bank is 200%. The LCR of the international bank is 205%
(c) Indicate and explain the main difference between the LCR and the capital ratios and whether this information would impact your previous comparison of the two banks.
Q2) Your parents also want to try option products to protect their position and increase their gains. Assume they bought a stock at $175 on 1 January. Equity research analysts give it an equal chance to be at $177 or $250 by 1 March. You consider the following options offered by a broker:
- A call with an exercise price of $185 and a premium of $15.
- A put with an exercise price of$145 and a premium of $15.
You explain two possible option strategies based on this offer: a covered call or a protective put.
(a) Illustrate which of the two option strategies is generally for protection and which is to make gains.
(b) Determine the pay-off and the profit realised on the covered call and protective put strategies under each of the two price scenarios by 1 March.
(c) Appraise the effectiveness of a straddle and a butterfly option spread strategy in the scenario where the share price stays at its initial level of $175.