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Individual & Group Assignments(2)

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Individual & Group Assignments(2)

Uploaded by

yenew
Copyright
© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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INJIBARA UNIVERSITY

COLLEGE OF BUSINESS & ECONOMICS


DEPARTMENT OF MANAGEMENT
MBA PROGRAM

Part I. Individual Assignment

1. Explain the concept of risk management in financial institutions.


2. Identify and describe the major categories of risks faced by financial institutions.
3. Discuss the importance of a robust risk management framework for financial
stability.
4. Evaluate different methods of mitigating credit risk in a financial institution.
5. Discuss the methods used to measure and manage market risk.
6. Analyze how interest rate and market price changes can impact a financial
institution's balance sheet.
7. Discuss the challenges of measuring and quantifying operational risk.
8. Evaluate strategies for mitigating operational risk in financial institutions.
9. Explain liquidity risk and its importance for financial institutions.
10. Discuss the factors that contribute to liquidity risk.
11. Analyze the tools and techniques used to manage liquidity risk.

Workout Questions
1. Consider the following balance sheet positions for a financial institution:
 Rate-sensitive assets _ $200 million
Rate-sensitive liabilities _ $100 million
 Rate-sensitive assets _ $100 million
Rate-sensitive liabilities _ $150 million
 Rate-sensitive assets _ $150 million
Rate-sensitive liabilities _ $140 million
a. Calculate the repricing gap and the impact on net interest income of a 1 percent
increase in interest rates for each position.
b. Calculate the impact on net interest income of each of the above situations,
assuming a 1 percent decrease in interest rates.
c. What conclusion can you draw about the repricing model from these results?
2. An insurance company has invested in the following fixed-income securities: (a)
$10,000,000 of five-year Treasury notes paying 5 percent interest and selling at par
value, (b) $5,800,000 of 10-year bonds paying 7 percent interest with a par value of
$6,000,000, and (c) $6,200,000 of 20-year subordinated debentures paying 9 percent
interest with a par value of $6,000,000.
a. What is the weighted average maturity of this portfolio of assets?
b. If interest rates change so that the yields on all the securities decrease by 1
percent, how does the weighted average maturity of the portfolio change?
c. Explain the changes in the maturity values if the yields increase by 1 percent.
d. Assume that the insurance company has no other assets. What will be the effect
on the market value of the company’s equity if the interest rate changes in (b)
and (c) occur?
INJIBARA UNIVERSITY
COLLEGE OF BUSINESS & ECONOMICS
DEPARTMENT OF MANAGEMENT

MBA PROGRAM

Part II. Group Assignment (Case Analysis)


1. The following is an excerpt taken from a January 11, 2008, speech entitled
“Monetary Policy Flexibility, Risk Management, and Financial Disruptions” by Federal
Reserve Governor Frederic S. Mishkin
(www.federalreserve.gov/newsevents/speech/mishkin20080111a.htm):

Although financial markets and institutions deal with large volumes of information,
some of this information is by nature asymmetric. . . . Historically, banks and other
financial intermediaries have played a major role in reducing the asymmetry of
information, partly because these firms tend to have long-term relationships with their
clients.
The continuity of this information flow is crucial to the process of price discovery. . . .
During periods of financial distress, however, information flows may be disrupted and
price discovery may be impaired. As a result, such episodes tend to generate greater
uncertainty.
Answer the following questions about the statement:
a. What is meant by asymmetric “information by nature”?
b. What is the problem caused by information asymmetry in financial
markets?
c. How do you think banks have historically “played a major role in reducing
the asymmetry of information”?
d. What is meant by “price discovery”?
e. Why is the continuity of information flow critical to the process of price
discovery?
2. The following is an excerpt taken from a November 30, 2007, speech entitled
“Innovation, Information, and Regulation in Financial Markets” by Federal Reserve
Governor Randall S. Kroszner
(www. federalreserve.gov/newsevents/speech/kroszner20071130a.htm):

Innovations in financial markets have created a wide range of investment opportunities


that allow capital to be allocated to its most productive uses and risks to be dispersed
across a wide range of market participants. Yet, as we are now seeing, innovation can
also create challenges if market participants face difficulties in valuing a new
instrument because they realize that they do not have the information they need or if
they are uncertain about the information they do have. In such situations, price
discovery and liquidity in the market for those innovative products can become impaired.

Answer the questions about the statement:


a. What are the information costs associated with financial assets?
b. What is meant by “liquidity”?
c. Why do you think that for innovative financial products price discovery and
liquidity could become impaired?

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