An interest rate swap involves the exchange of a fixed rate of interest for a floating rate of interest with both being applied to the same principal. The principals are not exchanged.What is the nature of the credit risk for a bank when it enters into a five-year interest rate swap with a notional principal of $100 million? Assume the swap is worth zero initially. 15.4 In a currency swap, interest on a principal in one currency is exchanged for inter- est on a principal in another currency. The principals in the two currencies are exchanged at the end of the life of the swap.Why is the credit risk on a currency swap greater than that on an interest rate swap? 15.5 A four-year interest rate swap currently has a negative value to a financial institu- tion. Is the financial institution exposed to credit risk on the transaction? Explain your answer. How would the capital requirement be calculated under Basel I? 15.6 Estimate the capital required under Basel I for a bank that has the following trans- actions with a corporation. Assume no netting. (a) A nine-year interest rate swap with a notional principal of $250 million and a current market value of ?$2 million. (b) A four-year interest rate swap with a notional principal of $100 million and a current value of $3.5 million. (c) A six-month derivative on a commodity with a principal of $50 million that is currently worth $1 million. 15.7 What is the capital required in Problem 15.6 under Basel I assuming that the 1995 netting amendment applies? 15.8 All the derivatives transactions a bank has with a corporate client have a positive value to the bank.What is the value to the bank of netting provisions in its master agreement with the client? 15.9 Explain why the final stage in the Basel II calculations for credit risk (IRB),market risk, and operational risk is to multiply by 12.5. 15.10 What is the difference between the trading book and the banking book for a bank? A bank currently has a loan of $10 million to a corporate client. At the end of the life of the loan, the client would like to sell debt securities to the bank instead of borrowing. How does this potentially affect the nature of the bank's regulatory capital calculations? 15.11 Under Basel I, banks do not like lending to highly creditworthy companies and prefer to help them issue debt securities. Why is this? Do you think this changed as a result of Basel II? 15.12 Banks sometimes use what is referred to as regulatory arbitrage to reduce their capital. What do you think this means? 15.13 Equation (15.9) gives the formula for the capital required under Basel II. It involves four terms being multiplied together. Explain each of these terms. 15.14 Explain the difference between the simple and the comprehensive approach for adjusting capital requirements for collateral. 15.15 Explain the difference between the standardized approach,the IRB approach, and the Advanced IRB approach for calculating credit risk capital under Basel II. [10:16 AM, 11/10/2021] vii: Explain the difference between the basic indicator approach, the standardized approach, and the advanced measurement approach for calculating operational risk capital under Basel II. 15.17 Suppose that the assets of a bank consist of $200 million of retail loans (not mort- gages).The PD is 1% and the LGD is 70%.What are the risk-weighted assets under the Basel II IRB approach? What are the Tier 1 and Tier 2 capital requirements? 15.18 Section 12.10 discusses how statistics can be used to accept or reject a VaR model. Section 15.6 discusses guidelines for bank supervisors in setting the VaR multiplier mc. It explains that, if the number of exceptions in 250 trials is five or more, then mc is increased. What is the chance of five or more exceptions if the VaR model is working well? Further Questions 15.19 Why is there an add-on amount in Basel I for derivatives transactions? "Basel I could be improved if the add-on amount for a derivatives transaction depended on the value of the transaction." How would you argue this viewpoint? 15.20 Estimate the capital required under Basel I for a bank that has the following trans- actions with another bank. Assume no netting. (a) A two-year forward contract on a foreign currency,currently worth $2 million, to buy foreign currency worth $50 million (b) A long position in a six-month option on the S&P 500. The principal is $20 million and the current value is $4 million. (c) A two-year swap involving oil. The principal is $30 million and the current value of the swap is -$5 million. What difference does it make if the netting amendment applies? 15.21 A bank has the following transaction with a AA-rated corporation (a) A two-year interest rate swap with a principal of $100 million that is worth $3 million (b) A nine-month foreign exchange forward contract with a principal of $150 million that is worth -$5 million (c) A long position in a six-month option on gold with a principal of $50 million that is worth $7 million What is the capital requirement under Basel I if there is no netting? What difference does it make if the netting amendment applies? What is the capital required under Basel II when the standardized approach is used? 15.22 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 matu- rity is three years and the LGD is 60%. What is the total risk-weighted assets for credit risk under the Basel II 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?

Pangus is a wealthy investor residing in Vancouver. He is looking for new start-up businesses to invest in. Pineapple Vision Inc. recently developed a new software for produce companies to purchase fruit stock for their produce business, Pangus is very interested in the business and would like to invest $1 million dollars into it. Before he invests into the business, he hires the accounting firm, Michael Rocks Accounting Inc, to review the financial documents of the Pineapple Vision Inc, and deliver to Pangus a detailed report on the financial projections of the Company. Answer the following Questions: a) Does Michael Rocks Accounting owe a duty of care to Pangus? Explain. (2 Marks) b) Assuming there is a duty of care, what is the standard of care required for Michael Rocks Accounting Inc , when delivering the financial projections to Pangus? Please fully explain the law on this point (1.5 Marks) c) Assume that the financial projections included a statement from Michael Rocks Accounting that the Company is not a good financial state and provides reasonable information to Pangus that he should not invest and if there is any loss then there will be no liability on Michael Rocks Accounting, Pangus reads and understands this and still invests into the Company. He suffers a major financial loss. Can he successfully sue Michael Rocks Accounting for this? Why? (1 5 Marks)2. This question is worth 4 points, Partial credit is possible but not guaranteed. Rounding is not required, but is also not penalized. A. Use the following information to determine and specifically identify comparative advantage for each good. (2 points) Chu and Raquan each own a small tech business. Currently, they compete, providing website design consultation (WD) and marketing algorithms (MA) to customers. Ragaun then has the idea that if they trade with each. they may both be better off. On any given day, the maximum each can produce is: WD MA Chu 10 12 Raquan 25 20 B. Use the following Information to determine the gains from trade for Chu. (2 points) Assume that each produces the maximum amount of their comparative advantage good. Also assume that Chu trades 7 of her comparative advantage good for 7 of Raquan's comparative advantage good.There are n trading posts along a river numbered 1.. 2.. 3. .... n. At anyf of the posts you can rent a canoe to be returned at any other post downstream. {It is impossible to paddle against the river. since it is too fast..] For each possible departure point i and each possible arrival point] [1:- i]. the cost of a rental from ito j is known: it is IC[i.j] :- CI. However. it can happen that the cost of renting from i to] is higher than the total costs of a series of shorter rentals from i to i. In this case you can return the first canoe at some post k: between i and j and continue youriourney in a second [and. maybe. third. fourth ...} canoe. There is no extra charge for changing canoes in this way. Give a Owl) time dynamic programming algorithm to determine the minimum cost of a trip from trading post 1 to trading post n