(Answer all questions, each question is worth 15 marks) B1. FIM Bank has the following balance sheet (in millions), with the risk weights in parentheses. The bank has no off balance sheet activities. Assets Liabilities and Equity Cash (0% ) $20 Deposits $175 OECD interbank deposits (20%) 25 Subordinated debts (5 years) Mortgage loans (50%) 70 Non cumulative (perpetual) preference shares 5 Consumer loans (100%) Equity Total Assets $185 Total liabilities and equity $185 Assuming that operational risk and market risk are zero, does the bank have enough capital to meet the Basel III Common Equity Tier 1, Total Tier 1, Total capital requirements? (3 marks) What are the weaknesses of Basel I Risk Based Capital Requirements? (6 marks) What is the major feature in Basel II Capital Requirements? (6 marks) B2. FIM Bank is a US bank, issues a six-month, $1 million Eurodollar deposit at an annual interest rate of 6.5 per cent. It invests the funds in a six-month Singaporean dollar (S$) bond paying 7.5 per cent per year. The current spot rate is $0.74/S$. The six-month forward rate on the Singaporean dollar is being quoted at $0.745/S$. What is the net spread earned on this investment if the bank covers its foreign exchange exposure using the forward market? (5 marks) Explain how forward and spot rates will both change in response to the spread calculated in part (a)? (5 marks) If the bank decides to hedge foreign exchange risk using on-balance sheet techniques, what conditions are necessary to achieve a perfect hedge ? Explain how the conditions are