Suppose that the assets of a bank consist of $500 million of loans to BBB-rated corporations. The PD for the corporations is estimated as 0.3%. The average maturity is three years and the LGD is 60%. What is the total risk-weighted assets for credit risk under the Basel II advanced IRB approach? How much Tier 1 and Tier 2 capital is required? How does this compare with the capital required under the Basel II standardized approach and under Basel I?
Answer to relevant QuestionsExplain one way that the Dodd–Frank Act is in conflict with (a) the Basel international regulations (b) the regulations introduced by other national governments. In Figure 18.3 where the CCP is used, suppose that an extra transaction between A and C which is worth 140 to A is cleared bilaterally. What effect does this have on the tables in Figure 18.3? Consider a European call option on a non-dividend-paying stock where the stock price is $52, the strike price $50, the risk-free rate is 5%, the volatility is 30%, and the time to maturity is one year. Answer the following ...Consider the following two events: (a) a bank loses $1 billion from an unexpected lawsuit relating to its transactions with a counterparty and (b) an insurance company loses $1 billion because of an unexpected hurricane in ...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.) (b) ...
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