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 33QA

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M6
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