A bank’s customer wants to exercise a $2,980,000 loan commitment

1. A bank’s customer wants to exercise a $2,980,000 loan commitment. Show the balance sheet after

the loan is established using stored liquidity to fund the loan. (6 points)

 

Assets Liabilities and Equity

 

Cash $1,930,500 Deposits $17,900,000

 

Loans 12,873,400 Equity 4,553,900

 

Securities 7,650,000

 

Total Assets $22,453,900 Total Liabilities and Equity $22,453,900

 

2. A bank has the following balance sheet. It expects a net deposit drain of $7,890,000. Show the

 

bank’s balance sheet if it used purchased liquidity to offset the expected drain. (6 points)

 

Assets Liabilities and Equity

 

Cash $2,136,300 Deposits $23,986,300

 

Loans 22,870,400 Equity 8,770,400

 

Securities 7,750,000

 

Total Assets $32,756,700 Total Liabilities and Equity $32,756,700

 

3. A bank has $27 million in cash and equivalents, average loans of $110 million and average deposits

 

of $93 million. (3 points each)

 

a. Calculate the bank’s financing gap.

 

b. Suppose the bank’s financing gap was $15 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

 

$ 2,945.00 M

 

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

 

204.56 M

 

Average daily vault cash during the reserve maintenance period 87.54 M

 

a. Calculate the bank’s target reserve using the requirements prior to January 2020. (6 points)

 

2

 

b. Calculate the amount of reserves that the bank must maintain with the Federal Reserve

 

assuming vault cash does not change during the maintenance period based on the

 

requirements prior to January 2020. (4 points)

 

c. 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

 

$200 M 1-year U.S. loans (made in U.S.

 

dollars)

 

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

 

$500 M equivalent 1-year Japanese loans

 

(made in yen)

 

$400 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 arrange an on-balance-sheet hedge for its foreign exchange rate risk? Be

 

sure to explain how the hedge helps the bank address its risk in your response. (4 points)

 

6. A U.S.-based insurance company invested $6,750,000 in a euro-denominated security when the

 

exchange rate was $1.22/€. The exchange rate is now $1.08/€.

 

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 Mex$10,000,000 corporate bond and has Mex$4,000,000

 

of claims reserves. It has also bought Mex$2,000,000 and sold Mex$3,000,000. The current

 

exchange rate is $0.059/Mex$. (Mex$ indicates Mexican pesos.)

 

a. Calculate the bank’s dollar net exposure to Mexican pesos. Note that your answer should be in

 

U.S. dollars. (10 points)

 

b. If the dollar-per-Mexican peso exchange rate decreases by 11%, what is the bank’s dollar

 

expected gain or loss? (6 points)

 

c. What position in a forward contract based on Mexican pesos 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. (4 points)

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