Bank of City One has credit asset of $120 million with a spread of 85 basis points over HIBOR. (HIBOR is currently 1.77% p.a.) Suppose Bank of City One has to pay 70 basis point of its credit asset value to CDS seller and the new risk weighting becomes 20%. 

Determine the ROE with the use of the CDS.

Additional information: 

The Bank aims to maintain 10.5% CAR and funding cost is HIBOR. Assume no reserve requirement.

Answer rating: 100% (QA)

SOLUTION To determine the Return on Equity ROE with the use of the Credit Default Swap CDS we need t... View the full answer