A bank’s customer wants to exercise a $6,750,000 loan commitment. Show the balance sheet after the loan is established using purchased liquidity to fund the loan. (6 points)

Assets Liabilities and Equity

Cash $1,550,000 Deposits $7,960,000

Loans 3,470,000 Equity 1,440,000

Securities 4,380,000

Total Assets $9,400,000 Total Liabilities and Equity $9,400,000

2. A bank has the following balance sheet. It expects a net deposit drain of $1,430,000. Show the bank’s balance sheet if it used stored liquidity to offset the expected drain. (6 points)

Assets Liabilities and Equity

Cash $875,000 Deposits $6,900,000

Loans 3,950,000 Equity 975,000

Securities 3,050,000

Total Assets $7,875,000 Total Liabilities and Equity $7,875,000

3. A bank has $92 million in cash and equivalents, average loans of $387 million and average deposits of $372 million. (3 points each)

a. Calculate the bank’s financing gap.

b. Suppose the bank’s financing gap was $19 million yesterday. What does the difference between today’s financing gap and yesterday’s financing gap indicate to the bank about its liquidity position?

c. Calculate the bank’s financing requirement.

d. What does the bank’s financing requirement mean for the bank? How will it use this information to manage its liquidity?

4. A commercial bank has provided the following financial information.

Average daily net transaction accounts balance during the reserve computation period $732.45 M

Average daily reserves held with the Federal Reserve during the reserve maintenance period 45.93 M

Average daily vault cash during the reserve maintenance period 16.82 M

Reserve carry forward 0 M

a. Calculate the amount of reserves that bank must maintain with the Federal Reserve. (10 points) 2

b. Is the bank undershooting or overshooting the reserve target? Support your response. (4 points)

5. A U.S.-based commercial bank has the following assets and liabilities.

Assets Liabilities

$300 M 1-year U.S. loans (made in U.S. dollars) $200 M 1-year U.S. CDs (made in dollars)

$400 M equivalent 1-year Japanese loans (made in yen) $500 M 1-year Japanese CDs (made in yen)

a. Explain whether the bank’s asset position is net long or net short in yen. (4 points)

b. Is the bank more likely to be concerned about the appreciation or depreciation of the yen relative to the U.S. dollar? Why? (6 points)

c. How could the bank adjust its assets and/or liabilities to hedge its foreign exchange rate risk? Be sure to explain how these adjustments will help the bank hedge its risk in your response. (4 points)

6. A U.S.-based insurance company invested $3,400,000 in a euro-denominated security when the exchange rate was $1.01/€. The exchange rate is now $1.07/€.

a. Explain whether the U.S. dollar has appreciated or depreciated against the euro. (4 points)

b. Calculate the return on the investment for the insurance company based only on the change in the exchange rate. (10 points)

7. A U.S.-based insurance company owns a £4,800,000 corporate bond and has of £6,200,000 of claims reserves. It has also bought £325,000 and sold £420,000. The current exchange rate is $1.22/£.

a. Calculate the bank’s dollar net exposure to pounds. Note that your answer should be in U.S. dollars. (10 points) b. If the dollar-per-pound exchange rate increases by 8%, what is the bank’s dollar expected gain or loss? (6 points) c. What position in a forward contract based on pounds could the insurance company take to hedge its foreign exchange rate risk? Be sure to explain how this position will hedge the insurance company’s risk in your response.

Answer rating: 100% (QA)

1 After establishing the 6750000 loan commitment using purchased liquidity the banks balance sheet would be as follows Assets Liabilities and Equity Cash 1550000 Deposits 7960000 Loans 6750000 Equity ... View the full answer