Explain your answers and show the details of your calculations. 21. Assume that the banking sector, composed

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Explain your answers and show the details of your calculations. 21. Assume that the banking sector, composed of only three banks, currently holds $million 10 reserves and would ideally like to hold $million 15. Draw the above situation in the market for reserves diagram. Describe the individual holding and demand for reserves of each of the three banks compatible with the data above and resulting in Bank A and B competing to borrow from Bank 0. [There are more than one correct answer] (5 marks) 22. Bank A has the following characteristics: ($ billion) Bank A Balance sheet size 2,000 RWA with Basel l?xed risk . 1,400 weights RWA with risk weights de?ned by credit rating 900 Common equity Tier I capital 40 Additional Tier I capital 30 Tier II capital 20 (a) Infer the credit risk of Bank A's assets from the data provided above. (5 marks) (b) Calculate the minimum common equity Tier I capital that BankA needs in order to meet Basel ||| standards. Conclude if BankA complies with this requirement. (5 marks)

23. Keele Bank has the following items on its balance sheet (expressed in $bi|lion). (a) (b) ESF Accumulated retained rofit Term Deposits of customers Loans to households Capital notes on issue Demand deposits of customers Shares on issue Provisions for bad and doubtful debt Loans to businesses Capital Reserve Government securities tradin Government securities (available for sale} Build Keele Bank's balance sheet incorporating all the above items and calculate Keele Bank's equity. (5 marks) Using a separate and only one balance sheet, represent the effect of the following operations on the balance sheet of the bank described in question (a). [Only represent variations, not absolute levels. ] (i) The market value of the government bonds held by Keele Bank for trading purposes increases by $3 billion. (ii) The market value of the government bonds held by Keele Bank for liquidity purposes increases by $2 billion. (iii) Keele Bank writes off $15 billion of loans made to households. (iv) Keele Bank makes $1 billion new loans to businesses that have an account in the bank. (v) Keele Bank buys new furniture for $0.2 billion from a company that is not a customer of the bank. (5 marks)

24. Two current spot rates (annualized) for maturities expressed in years are available: o/3=4% and 0/7=6.5%. The first subscript refers to the starting date of the investment while the second subscript refers to the term/maturity of the investment. [Note that the second subscript is NOT a date but a length.] The market has the following expectations: 1/ 5=5%, 3/-2=5.5%, 4/ 2=6%, and 5/#1=7%. (a) Assuming that the expectations theory of interest rates holds, calculate the value of o/6 compatible with the data above. Answer the question assuming six- monthly compounding. (5 marks) (b) Assuming that the expectations theory of interest rates holds, extract the value of 3/ 3 compatible with your result in (a) and the data above. Answer the question assuming six-monthly compounding. (5 marks) 25. Share A is currently priced at $11 while share B is priced at $14. The hedge fund currently does not hold any positions in any of the two shares. (a) Describe the strategy that the hedge fund should pursue at once (t=0) if it forecasts that the difference between the prices will increase in the future. Explain your answer. (2 marks) (b) Assume the hedge fund is fast enough in arranging the borrowing of shares to benefit from the prices movements mentioned above. Seven days after the implementation of the strategy described in (a) share A is priced at $13 while share B is priced at $16. The hedge fund undoes the positions taken previously. Represent on a time line the part of the strategy that involved legal short- selling. All transactions should appear, including the transactions with the original owner of the shares. Settlement occurs two days after trading (T+2). (3 marks) (c) Draw the table of cash flows associated with the hedge fund's strategy described in (a) for the prices defined in (b) and for a parcel of 10 shares of A and 10 shares of B. Calculate the profit of the hedge fund's strategy. Assume that the security borrowing fees are zero and that settlement occurs two days after trading (T+2). (5 marks)

26. Consider the market for reserves as the analytical framework for the determination of the sash rate in Australia. {a} Draw a diagram of determination of the sash rate incorporating in the analysis both the lending and deposit faoilities. Assume that the cash rate target of 035% has been reached by the Reserve Bank of Australia {REA}. Explain your diagram in details. {'5 marks) {b} The RBA decides to increase the target to 1.00%. Explain and illustrate in a new diagram the transition to the new target. (5 marks)