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Financial Institutions Management A Risk Management Approach 6th Edition Anthony Saunders, Marcia Cornett - Solutions
1. What requirements were placed on foreign banks by the IBA?
1. What advantages and disadvantages did foreign banks have relative to domestic banks before the passage of this legislation?
1. What was the fundamental philosophical focus of the International Banking Act (IBA) of 1978?
1. What factors affected the relative growth of the proportion of U.S. banking assets that were controlled by foreign banks during the 1990s into 2006?
1. What is the European Community (EC) Second Banking Directive? What impact has the Second Banking Directive had on the competitive banking environment in Europe?Identify and discuss the various ways in which foreign banks can enter the U.S. market. What are international banking facilities?
1. What factors gave Japanese banks significant advantages in competing for international business for an extended period through the mid-1990s? What are the advantages of size in a competitive market? Does size necessarily imply high profitability?
1. What effect have the problems of emerging-market economies in the late 1990s had on the global expansion of traditional banking activities by U.S. banks?
1. What is the expected impact of the implementation of the Basel II risk-based capital requirements on the international activities of some major U.S. banks?
1. Identify and explain the impact of at least four factors that have encouraged global U.S. bank expansion.
1. What is a Eurodollar transaction? What are Eurodollars?
1. 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 2006? Which types of foreign assets saw the largest amount of growth?
1. What are three ways in which an FI can establish a global or international presence?
1. What are some of the benefits for banks engaging in domestic geographic expansion?
1. How has the performance of merged banks compared to that of bank industry averages?
1. What are some of the important firm-specific financial factors that influence the acquisition of an FI?
1. What are the results of studies that have examined the mergers of banks, including postmerger performance? How do they differ from the studies examining mergers of nonbanks?
1. According to empirical studies, what factors have the highest impact on merger premiums as defined by the ratio of a target bank’s purchase price to book value?
1. What are some plausible reasons for the percentage of assets of small banks decreasing and the percentage of assets of large banks increasing while the percentage of assets of intermediate banks has stayed constant since 1984?
1. What factors other than market concentration does the Justice Department consider in determining the acceptability of a merger?
1. The Justice Department measures market concentration using the HHI of market share. What problems does this measure have for (a) multiproduct FIs and(b) FIs with global operations?
1. What is likely to be the Justice Department’s response to the two merger applications?
1. If Bank C acquires Bank D, what will be the impact on the market’s level of concentration?
1. If Bank A acquires Bank D, what will be the impact on the market’s level of concentration?
1. The Justice Department has been asked to review a merger request for a market with the following four FIs:What is the HHI for the existing market?
1. Assume that the Justice Department will allow mergers as long as the changes in HHI do not exceed 1,400. What is the minimum amount of assets that City Bank will have to divest after it merges with State Bank?
1. If City Bank acquires State Bank, what will be the new HHI?
1. What is the concentration ratio as measured by the Herfindahl-Hirschman Index (HHI)?
1. City Bank currently has a 60 percent market share in banking services, followed by NationsBank with 20 percent and State Bank with 20 percent.
1. What is the Herfindahl-Hirschman Index? How is it calculated and interpreted?
1. What does the Berger and Humphrey study reveal about the cost savings from bank mergers? What differing results are revealed by the Rhoades study?What are the three revenue synergies that may be obtained by an FI from domestic geographic expansion?
1. Bank mergers often produce hard-to-quantify benefits called X-efficiencies and costs called X-inefficiencies. Give an example of each.
1. How did the provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 allow for full interstate banking? What are the expected profit performance effects of interstate banking? What has been the impact on the structure of the banking and financial services industry?
1. How did the development of the nonbank bank competitive strategy further clarify the meaning of the term activities closely related to banking? In a more general sense, how has this strategy assisted the banking industry in its attempts to provide services and products outside the strictly
1. What is a nonbank bank? What legislation allowed the creation of nonbank banks? What role did nonbank banks play in the further development of interstate banking activities?
1. What significant economic events during the 1980s provided the incentive for the Garn-St. Germain Act and FIRREA to allow further expansion of interstate banking?
1. What is an interstate banking pact? How did the three general types of interstate banking pacts differ in their encouragement of interstate banking?
1. What is the difference between an MBHC and an OBHC?
1. In what ways did the banking industry continuously succeed in maintaining interstate banking activities during the 50-year period beginning in the early 1930s? What legislative efforts did regulators use to respond to each foray by banks into previously prohibited banking and commercial
1. Why were unit and money center banks opposed to bank branching in the early 1900s?
1. In what way did the Garn-St. Germain Act and FIRREA provide incentives for the expansion of interstate branching?
1. How are insurance companies able to offer services in states beyond their state of incorporation?
1. How do limitations on domestic geographic diversification affect an FI’s profitability?
1. Comparing the advantages and disadvantages discussed above, why do you think so few U.S. banks have established branches in the Ukraine?
1. What are the major disadvantages of international expansion to an FI?
1. What are the major advantages of international expansion to an FI?
1. What impact did the passage of the International Banking Act of 1978 have on foreign bank activities in the United States?
1. What are the primary forms of entry by foreign banks into the U.S. market?
1. What were the major policy changes pertaining to bank expansion introduced by NAFTA?
1. What regulatory and economic factors have encouraged the growth of U.S. offshore banking? What factors have deterred U.S. offshore banking?
1. In general, what do studies of the announcement effect and postmerger performance conclude?
1. If the abnormal returns for target banks are usually positive, does this mean that managers of acquiring banks tend to overpay the shareholders of the target bank?
1. Given the same scenario as in question 1, what three characteristics would most discourage you?
1. What three characteristics of the target FI would most attract you?
1. Suppose you are a manager of an FI looking at another FI as a target for acquisition.
1. Suppose each of five firms in a banking market has a 20 percent share. What is the HHI?
1. What are the three dimensions of revenue synergy gains?
1. What recent bank mergers have been motivated by cost synergies?
1. What were the main features of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994?
1. What are some of the ways in which interstate banking barriers have been eroded?
1. What was the difference between the interstate banking restrictions imposed under the 1956 Bank Holding Company Act and those passed under the 1970 amendments to the Bank Holding Company Act?
1. What three basic factors influence the attractiveness of geographic expansion to an FI?
1. Explain why regulation both inhibits and provides incentives to an FI to engage in geographic expansion.
1. How do interest rate increases affect the payoff from buying a call option on a bond?
1. How do they affect the profit from writing a call option on a bond?
1. How do interest rate increases affect the payoff from buying a put option on a bond?
1. How do they affect the profit from writing a put option on a bond?
1. In the example above, what number of put options should you purchase if .25 and D 6? ( N p 1,718.213)
1. If an FI has to hedge a $5 million liability exposure in Swiss francs (Sf), what options should it purchase to hedge this position? Using Figure 24–13 , how many contracts of Swiss franc futures options should it purchase (assuming no basis risk) if it wants to hedge against the Sf falling in
1. In Example 24–4 suppose that in year 2 the highest and lowest rates were 12 percent and 6 percent instead of 11 percent and 7 percent. Calculate the fair premium on the cap. ($980,500)
1. Assume two exercise dates at the end of year 1 and the end of year 2. Suppose the FI buys a floor of 4 percent at time 0. The binomial tree suggests that rates at the end of year 1 could be 3 percent (p .5) or 5 percent (p .5) and at the end of year 2 rates could be 2 percent (p .25), 4
1. Why are only the most creditworthy FIs able to write a large cap/floor book without external guarantees?
1. What is a call option?
1. What is a put option?
1. 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:What are the two ways to use call and put options on T-bonds to generate positive cash flows when interest rates decline? Verify
1. In each of the following cases, identify what risk the manager of an FI faces and whether that risk should be hedged by buying a put or a call option.A commercial bank plans to issue CDs in three months.An insurance company plans to buy bonds in two months.A thrift plans to sell Treasury
1. Consider an FI that wishes to use bond options to hedge the interest rate risk in the bond portfolio.
1. How does writing call options hedge the risk when interest rates decrease?
1. Will writing call options fully hedge the risk when interest rates increase?Explain.
1. How does buying a put option reduce the losses on the bond portfolio
1. when interest rates rise?
1. Diagram the purchase of a bond call option against the combination of a bond investment and the purchase of a bond put option.
1. 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. The current one-year interest rate is 7 percent, and the one-year rate in one year is forecast to be
1. What was the yield on the bond at the time of purchase?
1. What is the market-determined, implied one-year rate one year before maturity?
1. What is the expected sale price if the bond has to be sold at the end of one year?
1. Diagram the bond prices over the two-year horizon.
1. If the FI buys a put option with an exercise price equal to your answer in
1. part (c), what will be its value at the end of one year?
1. What should be the premium on the put option today?
1. Diagram the values of the put option on the two-year, zero-coupon bond.
1. What would have been the premium on the option if the one-year interest rates at the end of one year were expected to be 8.14 percent and 7.34 percent?
1. 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 equal probability of a 1 percent increase or a 1 percent decrease. The Treasury bond, when
1. What is the pension fund manager’s interest rate risk exposure?
1. How can the pension fund manager use options to hedge this interest rate risk exposure?
1. What prices are possible on the 20-year T-bonds at the end of year 1 and year 2?
1. Diagram the prices over the two-year period.
1. If options on $100,000, 20-year, 8 percent coupon Treasury bonds (both puts and calls) have a strike price of 101, what are the possible (intrinsic) values of the option position at the end of year 1 and year 2?Diagram the possible option values.
1. What is the option premium? (Use an 8 percent discount factor.)
1. Consider Figure 24–13 . What are the prices paid for the following futures option?June T-bond calls at 116.June 10-year T-note puts at 109.March Eurodollar calls at 9525 (95.25).
1. Consider Figure 24–13 again. What happens to the option price of the following?A call when the exercise price increases.A call when the time until expiration increases.A put when the exercise price increases.A put when the time to expiration increases.An FI manager writes a call option on a
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