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Questions and Answers of Banking

What are the three revenue synergies that may be obtained by an FI from domestic geographic expansion?
What is the Herfindahl-Hirschman Index? How is it calculated and interpreted?
City Bank currently has a 60 percent market share in banking services, followed by NationsBank with 20 percent and State Bank with 20 percent.a. What is the concentration ratio as measured by the
What factors other than market concentration does the Justice Department consider in determining the acceptability of a merger?
What are some plausible reasons for the percentage of assets of small and medium sized banks decreasing and the percentage of assets of large banks increasing since 1984?
What are some of the benefits for banks engaging in geographic expansion?
How did the Overseas Direct Investment Control Act of 1964 assist in the growth of global banking activities? How much growth in foreign assets occurred from 1980 to 2012?
What restrictions were placed on Section 20 subsidiaries of U.S. commercial banks that made investment banking activities other than those permitted by the Glass-Steagall Act less attractive? How did
Identify and explain the impact of at least four factors that have encouraged global U.S. bank expansion.
What is the expected impact of the implementation of Basel III risk-based capital requirements on the international activities of some major U.S. banks?
What is the European Community (EC) Second Banking Directive? What impact has the Second Banking Directive had on the competitive banking environment of Europe?
What factors affected the proportion of U.S. banking assets that were controlled by foreign banks during the 1990s through 2012?
What was the fundamental philosophical focus of the International Banking Act (IBA) of 1978?
What events led to the passage of the Foreign Bank Supervision Enhancement Act (FBSEA) of 1991? What was the main objective of this legislation?
What were the main features of FBSEA? How did FBSEA encourage cooperation with the home country regulator? What was the effect of the FBSEA on the Federal Reserve and on the foreign banks?
What are the major advantages of international expansion to FIs? Explain how each advantage can affect the operating performance of FIs?
What are the difficulties of expanding globally? How can each of these difficulties create negative effects on the operating performance of FIs?
Explain in general terms what impact the Financial Services Modernization Act of 1999 should have on the strategic implementation of section 20 activities.
What types of insurance products were commercial banks permitted to offer before 1999? How did the Financial Services Modernization Act of 1999 change this? How have nonbanks managed to exploit the
The Financial Services Modernization Act of 1999 allows banks to own controlling interests in nonfinancial companies. What are the two restrictions on such ownership?
What is shadow banking? How does the shadow banking system differ from the traditional banking system?
What are the differences in the risk implications of a firm commitment securities offering versus a best-efforts offering?
An FI is underwriting the sale of 1 million shares of Ultrasonics, Inc., and is quoting a bid-ask price of $6.00-$6.50. a. What are the fees earned by the FI if a firm commitment method is used to
Use the following December 31, 2014 market value balance sheet for Bank One to answer the questions below.The bank's manager thinks rates will increase by 0.50 percent in the next 3 months. To hedge
What are derivative contracts? What is the value of derivative contracts to the managers of FIs? Which type of derivative contracts had the highest notional value outstanding among all U.S. banks as
What are the reasons why an FI may choose to hedge selectively its portfolio?
What is meant by tailing the hedge? What factors allow an FI manager to tail the hedge effectively?
What is the meaning of the Treasury bond futures price quote 101 130?
What is meant by fully hedging the balance sheet of an FI?
Reconsider Tree Row Bank in problem 16 but assume that the cost rate on the liabilities is 6 percent. On-balance-sheet rates are expected to increase by 100 basis points. Further, assume there is
What are some of the major differences between futures and forward contracts? How do these contracts differ from spot contracts?
An FI is planning to hedge its $100 million bond instruments with a cross hedge using Eurodollar interest rate futures. How would the FI estimate br = [(Rf/(1+Rf) / (R/(1+R)] to determine the exact
Assume an FI has assets of $250 million and liabilities of $200 million. The duration of the assets is six years and the duration of the liabilities is three years. The price of the futures contract
Suppose an FI purchases a $1 million 91-day (360-day year) Eurodollar futures contract trading at 98.50. a. If the contract is reversed two days later by selling the contract at 98.60, what is the
An FI has an asset investment in euros. The FI expects the exchange rate of $/€ to increase by the maturity of the asset. a. Is the dollar appreciating or depreciating against the euro? b. To
What is meant by tailing the hedge? What factors allow an FI manager to tail the hedge effectively? Discuss.
What is a naive hedge? How does a naive hedge protect an FI from risk?
What does the hedge ratio measure? Under what conditions is this ratio valuable in determining the number of futures contracts necessary to hedge fully an investment in another currency?
What technique is commonly used to estimate the hedge ratio? What statistical measure is an indicator of the confidence that should be placed in the estimated hedge ratio? What is the interpretation
An FI has assets denominated in British pounds of $125 million and pound liabilities of $100 million. The exchange rate of dollars for pounds is currently $1.60/£. a. What is the FI's net
An FI is planning to hedge its one-year, 100 million Swiss franc (SF)-denominated loan against exchange rate risk. The current spot rate is $0.60/SF. A 1-year SF futures contract is currently
A U.S. FI has a long position in £75,500,000 assets funded with U.S. dollar denominated liabilities. The FI manager is concerned about the £ appreciating relative to the dollar and is considering a
An FI has made a loan commitment of SF10 million that is likely to be taken down in six months. The current spot rate is $0.60/SF.a. Is the FI exposed to the dollar’s depreciating or appreciating
A U.S. FI has assets denominated in Swiss francs (SF) of 75 million and liabilities of 125 million. The spot rate is $0.6667/SF, and one-year futures are available for $0.6579/SF. a. What is the
What is a credit forward? How is it structured?
What is the gain on the purchase of a $20 million credit forward contract with a modified duration of seven years if the credit spread between a benchmark Treasury bond and a borrowing firm’s debt
How is selling a credit forward similar to buying a put option?
A property-casualty (PC) insurance company has purchased catastrophe futures contracts to hedge against losses during the hurricane season. At the time of purchase, the market expected a loss ratio
What is the primary goal of regulators in regard to the use of futures by FIs? What guidelines have regulators given banks for trading in futures and forwards?
Contrast the position of being short with that of being long in futures contracts.
a. What is the FI’s obligation at the time the futures contract is purchased? b. If an FI purchases this contract, in what kind of hedge is it engaged? c. Assume that the Treasury bond futures
Long Bank has assets that consist mostly of 30-year mortgages and liabilities that are short-term demand and time deposits. Will an interest rate futures contract the bank buys add to or subtract
In each of the following cases, indicate whether it would be appropriate for an FI to buy or sell a forward contract to hedge the appropriate risk.a. A commercial bank plans to issue CDs in three
The duration of a 20-year, 8 percent coupon Treasury bond selling at par is 10.292 years. The bond’s interest is paid semiannually, and the bond qualifies for delivery against the Treasury bond
On January 4, 2015, an FI has the following balance sheet (rates = 10 percent)DGAP = [6 €“ (170/200)4] = 2.6 years > 0The FI manager thinks rates will increase by 0.75 percent in the next
How does using options differ from using forward or futures contracts?
What are the problems of using the Black-Scholes option pricing model to value bond options? What is meant by the term pull-to-par?
An FI has purchased a two-year, $1,000 par value zero-coupon bond for $867.43. The FI will hold the bond to maturity unless it needs to sell the bond at the end of one year for liquidity purposes.
A pension fund manager anticipates the purchase of a 20-year, 8 percent coupon Treasury bond at the end of two years. Interest rates are assumed to change only once every year at year-end, with an
Why are options on interest rate futures contracts preferred to options on cash instruments in hedging interest rate risk?
Consider Figure 23-13. What are the prices paid for the following futures options:a. March T-bond calls at $153. b. March 10-year T-note puts at $151.50c. December Eurodollar puts at 99.50 percent.
Consider Figure 23-13 again. What happens to the price of the following? a. A call when the exercise price increases. b. A call when the time until expiration increases. c. A put when the exercise
An FI manager writes a call option on a T-bond futures contract with an exercise price of 11400 at a quoted price of 0-55. a. What type of opportunities or obligations does the manager have?b. In
What is the delta of an option (()?
A mutual fund plans to purchase $10 million of 20-year T-bonds in two months. The bonds are yielding 7.68 percent. These bonds have a duration of 11 years. The mutual fund is concerned about interest
An FI must make a single payment of 500,000 Swiss francs in six months at the maturity of a CD. The FI’s in-house analyst expects the spot price of the franc to remain stable at the current
An American insurance company issued $10 million of one-year, zero-coupon GICs (guaranteed investment contracts) denominated in Swiss francs at a rate of 5 percent. The insurance company holds no SF
An FI has made a loan commitment of SF10 million that is likely to be taken down in six months. The current spot exchange rate is $0.60/SF.a. Is the FI exposed to the dollar depreciating or the
What is a credit spread call option?
How do the cash flows to the lender for a credit spread call option hedge differ from the cash flows for a digital default option spread?
What is a catastrophe call spread option? How do the cash flows of this option affect the buyer of the option?
What are caps? Under what circumstances would the buyer of a cap receive a payoff?
What must happen to interest rates for the purchaser of a call option on a bond to make money? How does the writer of the call option make money?
What are floors? Under what circumstances would the buyer of a floor receive a payoff?
What are collars? Under what circumstances would an FI use a collar?
How is buying a cap similar to buying a call option on interest rates?
Under what balance sheet circumstances would it be desirable to sell a floor to help finance a cap? When would it be desirable to sell a cap to help finance a floor?
Use the following information to price a three-year collar by purchasing an in-the-money cap and writing an out-of-the-money floor. Assume a binomial options pricing model with an equal probability
Use the following information to price a three-year collar by purchasing an out-of-the-money cap and writing an in-the-money floor. Assume a binomial options pricing model with an equal probability
Contrast the total cash flows associated with the collar position in question 34 against the collar in question 35. Do the goals of FIs that utilize the collar in question 34 differ from those that
An FI has purchased a $200 million cap of 9 percent at a premium of 0.65 percent of face value. A $200 million floor of 4 percent is also available at a premium of 0.69 percent of face value.a. If
What credit risk exposure is involved with buying caps, floors, and collars for hedging purposes?
What must happen to interest rates for the purchaser of a put option on a bond to make money? How does the writer of the put option make money?
Consider the following:a. What are the two ways to use call and put options on T-bonds to generate positive cash flows when interest rates decline? Verify your answer with a diagram.b. Under what
Consider an FI that wishes to use bond options to hedge the interest rate risk in the bond portfolio.a. How does writing call options hedge the risk when interest rates decrease?b. Will writing call
On January 4, 2015, an FI has the following balance sheet (rates = 8 percent)DGAP = [8 €“ (396/450)4] = 4.48 years > 0 The FI manager thinks rates will increase by 0.55 percent in the next
Explain the similarity between a swap and a forward contract.
What are off-market swap arrangements? How are these arrangements negotiated?
Describe how an inverse floater works to the advantage of an investor who receives coupon payments of 10 percent minus LIBOR if LIBOR is currently at 4 percent. When is it a disadvantage to the
An FI has $500 million of assets with a duration of nine years and $450 million of liabilities with a duration of three years. The FI wants to hedge its duration gap with a swap that has fixed-rate
A U.S. thrift has most of its assets in the form of Swiss franc-denominated floating-rate loans. Its liabilities consist mostly of fixed-rate dollar-denominated CDs. What type of currency risk and
A Swiss bank issues a $100 million, three-year Eurodollar CD at a fixed annual rate of 7 percent. The proceeds of the CD are lent to a Swiss company for three years at a fixed rate of 9 percent. The
Bank A has the following balance sheet information (in millions):Rate-sensitive assets are repriced quarterly at the 91-day Treasury bill rate plus 150 basis points. Fixed-rate assets have five
Use the following information to construct a swap of asset cash flows for the bank in problem 15. The bank is a price taker in both the fixed-rate market at 9 percent and the rate-sensitive market at
Consider the following currency swap of coupon interest on the following assets:5 percent (annual coupon) fixed-rate U.S. $1 million bond 5 percent (annual coupon) fixed-rate bond denominated in
Consider the following fixed-floating-rate currency swap of assets: 5 percent (annual coupon) fixed-rate U.S. $1 million bond and floating-rate SF1.5 million bond set at LIBOR annually. Currently
Forward, futures, and option contracts had been used by FIs to hedge risk for many years before swaps were invented. If FIs already had these hedging instruments, why did they need swaps?
How does a pure credit swap differ from a total return swap? How does it differ from a digital default option?
Why is the credit risk on a swap lower that the credit risk on a loan?
What is netting by novation?

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