Calculate firms aggregate indebtedness to net capital ratio

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Reference no: EM133684866

Assignment: Application Problem

I. A financial institution has the following assets:

A. A portfolio of 18-year zero-coupon bonds with a face value of $22 million and currently yielding 7.3%
B. A €9 million trading position in spot euros, with the current exchange rate of $1.05/€
C. A $14 million trading position in equities

1) Calculate the daily earnings at risk (DEAR) for the bonds, assuming a 62 basis point potential adverse move in yields.

2) Calculate the dollar DEAR for the position in euros, assuming a volatility of the daily percentage changes in the €/$ of 43 basis points and 99% confidence that an adverse move will not exceed this amount.

3) Calculate the DEAR for the equity position, assuming the standard deviation of daily returns on the equities is 342 basis points and 99% confidence that an adverse move will not exceed this amount.

4) Calculate the 9-day value at risk (VAR) for (i) the bonds, (ii) the euro position and (iii) the equity position.

5) Calculate the DEAR for a portfolio of these three assets. The correlation coefficients are 0.24 for the bonds and the euros, -0.29 for the bonds and the equities, and 0.43 for the equities and the euros.

II. A commercial bank has the following balance sheet (market value, millions). It also has $89 M in contingent assets and $125 M in contingent liabilities. Should these contingencies take place and these items move onto the balance sheet, what is the effect on the bank's equity? Reflect these changes on its balance sheet.

Assets		Liabilities and Equity
Cash	$ 24	Deposits	$204
Loans	285	Borrowed funds	182
Securities	135	Equity	58
Total Assets	$444	Total Liabilities and Equity	$444

III. A securities firm is considering automating some of its portfolio maintenance activities. The cost to install the system is $34.65 M. Until the system needs to be replaced in 5 years, the securities firm expects $10.34 M in after-tax savings each year due to the automation. If the company's cost of capital is 12%, should it automate the processes? Support your recommendation.

IV. A commercial bank has provided the balance sheet below. It has no off-balance sheet activities. Corporate bonds have a 100% loan-to-value risk weight and residential mortgages have a 50% loan-to-value risk weight.

Assets ($ millions)		Liabilities and Equity ($ millions)
Cash	$ 170	Deposits	$ 1,328
U.S. Treasury securities	325	Subordinated debentures	146
Corporate bonds	753	Common stock	41
Residential mortgages	284	Retained earnings	17
Total Assets	$ 1,532	Total Liabilities and Equity	$ 1,532

1) Calculate each of the following ratios. For each ratio, also explain which capital category zone the bank falls into.

a. CET1 risk-based capital ratio
b. Tier I risk-based capital ratio
c. Total risk-based capital ratio
d. Tier I leverage ratio

2) Given your calculations and the capital categories in 1., what prompt corrective actions will be required of the bank by its regulators? Explain.

V. A securities firm has provided the balance sheet below.

Assets ($ millions)		Liabilities and Equity ($ millions)
Cash	$ 46	Short-term funding	$ 65
Debt securities	680	Bonds	593
Equity securities	1,045	Debentures	1,145
Other assets	56	Equity	24
Total Assets	$ 1,827	Total Liabilities and Equity	$ 1,827

The debt securities have an annual 6.42% coupon rate, 15 years to maturity and a yield to maturity of 7.43%. The market value of the equity securities and the other assets is equal to their book value. The firm has 1,750,000 shares outstanding and the price per share is $12.68.

1) Calculate the firm's aggregate indebtedness to net capital ratio.

2) Calculate the firm's highly liquid assets to total liabilities ratio.

3) Based on the firm's ratios from 1 and 2, is it in compliance with Rule 15C 3-1? Why or why not?

6. The risk-based capital charges for a life insurance company are provided below. The insurer has total capital and surplus of $65.32 M.

Risk                                                      RBC Charge (millions)
Asset risk--affiliate (C0)                                  $ 5.22
Asset risk--other investments (C1o)                3.87
Asset risk--common stock (C1cs)                    12.56
Insurance risk (C2)                                        16.43
Interest rate risk (C3a)                                  10.76
Health credit risk (C3b)                                  4.32
Market risk (C3c)                                           7.93
Business risk (C4a)                                        8.15
Health business risk (C4b)                              1.42

1) Calculate the (a) risk-based capital (RBC) charge and (b) RBC level for the insurance company.

2) What supervisory action level applies to this insurer? Support your response with the calculation results from 1.

3) How much capital, if any, must the insurer raise to comply with the regulatory requirement?

7. The risk-based capital charges for a property-casualty insurance company are provided below. The insurer has total capital and surplus of $265.43 M.

Risk                                                       RBC Charge (millions)
Asset risk--OBS and affiliated P&C (R0)             $ 6.43
Asset risk--fixed income (R1)                           6.72
Asset risk--equity (R2)                                    12.87
Credit risk (R3)                                               9.35
Underwriting risk--premium (R4)                       95.43
Underwriting risk--reserve (R5)                         50.46
Catastrophe risk (Rcat)                                    78.92

1) Calculate the (a) risk-based capital (RBC) charge and (b) RBC level for the insurance company.

2) What supervisory action level applies to this insurer? Support your response with the calculation results from 1.

3) How much capital, if any, must the insurer raise to comply with the regulatory requirement?

Reference no: EM133684866

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