What will be the size of the di after the drain if the di

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Reference no: EM13503908

1.Export Bank has a trading position in euros and Australian dollars. At the close of business on October 20, the bank had €20 million and A$30 million. The exchange rates for the most recent six days are given below:

 

            Exchange Rates per U.S. Dollar at the Close of Business

                                     10/20      10/19      10/18      10/17      10/16     10/15

         Euros                1.3900    1.3870   1.3675   1.3775   1.3850   1.4015

         Australian $s     0.7800   0.7650   0.7900   0.7755    0.7605   0.7560

a.What is the foreign exchange (FX) position in dollar equivalents using the FX rates on October 20?

b.What is the sensitivity of each FX position; that is, what is the value of delta for each currency on October 20?

c.What is the daily percentage change in exchange rates for each currency over the five-day period?

d.What is the total risk faced by the bank on each day?  What is the worst-case day?  What is the best-case day?

2.      A DI with the following balance sheet (in millions) expects a net deposit drain of $15 million.

         Assets                                                                             Liabilities and Equity

         Cash                                 $10                                         Deposits                      $68

         Loans                                 50                                         Equity                             7

         Securities                           15

         Total assets                      $75                                         Total liabilities and equity $75

 

         Show the DI's balance sheet if the following conditions occur:

a.The DI purchases liabilities to offset this expected drain.

b.The stored liquidity management method is used to meet the expected drain.

3.AllStarBank has the following balance sheet (in millions):

 

         Assets                                                               Liabilities and Equity                          

         Cash                               $30                             Deposits                                        $110

         Loans                               90                             Borrowed funds                               40

         Securities                          50                             Equity                                               20

         Total assets                   $170                             Total liabilities and equity            $170

 

AllStarBank’s largest customer decides to exercise a $15 million loan commitment. How will the new balance sheet appear if AllStar uses the following liquidity risk strategies?

a.Stored liquidity management.

b.Purchased liquidity management.

4. A DI has assets of $10 million consisting of $1 million in cash and $9 million in loans. The DI has core deposits of $6 million, subordinated debt of $2 million, and equity of $2 million. Increases in interest rates are expected to cause a net drain of $2 million in core deposits over the year?

a. The average cost of deposits is 6 percent and the average yield on loans is 8 percent.  The DI decides to reduce its loan portfolio to offset this expected decline in deposits. What will be the effect on net interest income and the size of the DI after the implementation of this strategy?

b. If the interest cost of issuing new short-term debt is expected to be 7.5 percent, what would be the effect on net interest income of offsetting the expected deposit drain with an increase in interest-bearing liabilities? 

c.What will be the size of the DI after the drain if the DI uses this strategy?

d.What dynamic aspects of DI management would further support a strategy of replacing the deposit drain with interest-bearing liabilities?

5.A DI has $10 million in T-bills, a $5 million line of credit to borrow in the repo market, and $5 million in excess cash reserves (above reserve requirements) with the Fed. The DI currently has borrowed $6 million in fed funds and $2 million from the Fed discount window to meet seasonal demands.

a. What is the DI’s total available (sources of) liquidity?

b.What is the DI’s current total uses of liquidity?

c.What is the net liquidity of the DI?

d.What conclusions can you derive from the result?

Reference no: EM13503908

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