Third Bank has the following balance sheet (in millions) with the risk weights in parentheses. The cumulative preferred stock is qualified and perpetual. In addition, the bank has $40 million in performance-related standby letters of credit (SLCs), $50 million in two-year forward FX contracts that are currently in the money by $2 million, and $300 million in six-year interest rate swaps that are currently out of the money by $5 million. Credit conversion factors follow: Performance-related standby LCs 50% 1-5 year foreign exchange contracts 5% 1-5 year interest rate swaps 0.5% 5-10 year interest rate swaps 1.5% a) What are the risk-adjusted on-balance-sheet assets of the bank as defined under the Basel Accord? b)What is the total capital required for both off- and on-balance-sheet assets? c) Does the bank have enough capital to meet the Basel requirements? If not, what minimum Tier 1 or total capital does it need to meet the requirement?
Macrohedging
Hedging or hedge accounting is a risk-mitigation technique used to protect the current financial position from potential losses. Hedging is often confused with speculating. The major difference between the two is that hedging does not involve guessing, whereas speculation is based on guessing the direction of movement of the underlying asset to book profits.
Finance Mathematics
The area of applied mathematics known as mathematical finance, also known as quantitative finance or financial mathematics is concerned with the mathematical modeling of financial markets. The application of mathematical methods to financial problems is known as financial mathematics. A financial market is a place where people can exchange low-cost financial securities and derivatives. Stocks and bonds, raw materials, and precious metals, both of which are regarded as commodities in the stock markets, are examples of securities. It uses probability, statistics, stochastic processes, and economic theory as methods.
Third Bank has the following
The cumulative
Performance-related standby LCs 50%
1-5 year foreign exchange contracts 5%
1-5 year interest rate swaps 0.5%
5-10 year interest rate swaps 1.5%
a) What are the risk-adjusted on-balance-sheet assets of the bank as defined under the Basel Accord?
b)What is the total capital required for both off- and on-balance-sheet assets?
c) Does the bank have enough capital to meet the Basel requirements? If not, what minimum Tier 1 or total capital does it need to meet the requirement?
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