Estimate the capital required under Basel I for a bank [assume it is an OECD þank ] that has the following transactions with another bank. Assume no netting. i. A two-year forward contract on a foreign currency, currently worth $2 million, to buy foreign currency worth $50 million ii. A long position in a six-month option on the S&P 500. The principal is $20 million, and the current value is $4 million. iii. A two-year swap involving oil. The principal is $30 million, and the current value of the swap is –$5 million. iv. What difference does it make if the netting amendment applies? Show by calculations? Basel I encouraged banks to not lend to borrowers with higher ratings. Explain the specific v. reasons why?

Estimate the capital required under Basel I for a bank [assume it is an OECD þank ] that has the following transactions with another bank. Assume no netting. i. A two-year forward contract on a foreign currency, currently worth $2 million, to buy foreign currency worth $50 million ii. A long position in a six-month option on the S&P 500. The principal is $20 million, and the current value is $4 million. iii. A two-year swap involving oil. The principal is $30 million, and the current value of the swap is –$5 million. iv. What difference does it make if the netting amendment applies? Show by calculations? Basel I encouraged banks to not lend to borrowers with higher ratings. Explain the specific v. reasons why?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter8: Relationships Among Inflation, Interest Rates, And Exchange Rates

Section: Chapter Questions

Problem 46QA

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Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.

Question

Please answer all parts

Estimate the capital required under Basel I for a bank [assume it is an OECD bank ] that has the
following transactions with another bank. Assume no netting.
i.
A two-year forward contract on a foreign currency, currently worth $2 million, to buy
foreign currency worth $50 million
ii.
A long position in a six-month option on the S&P 500. The principal is $20 million, and
the current value is $4 million.
iii.
A two-year swap involving oil. The principal is $30 million, and the current value of the
swap is –$5 million.
iv.
What difference does it make if the netting amendment applies? Show by calculations?
Basel I encouraged banks to not lend to borrowers with higher ratings. Explain the specific
V.
reasons why?

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