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14 Nov 2018

Complete all three parts of this question.

Suppose KPM Bank has the following balance sheet (in billions of dollars):

Assets

Liabilities

Reserves

$10

Deposits

$80

Loans

$95

Capital

$25

a) If net profit of this bank is $2 billion, then what is the return on assets (ROA) and the return on equity (ROE)? Demonstrate that ROE = ROA x EM.

b) A bank has $105 billion of assets with average duration of 5 years and $80 billion of liabilities with average duration of 6 years. Conduct a duration analysis for the bank, and show what will happen to the net worth of the bank if interest rates fall by 1%. What action should the bank take to reduce interest rate risk?

c) A bank has $80 billion of fixed-rate liabilities, $25 billion of rate-sensitive liabilities, $10 billion of fixed-rate assets, and $95 billion of rate-sensitive assets. Conduct a gap analysis for the bank, and show what will happen to the bank profits if interest rates fall by 1%. What action should the bank take to reduce interest rate risk?

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Reid Wolff
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16 Nov 2018

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Related questions

2. Suppose you are the manager of the bank that has $15 million of fixed-rate assets, $30 million of interest rate- sensitive assets, $20 million of rate-fixed liabilities and $20 million of interest rate -sensitive liabilities. (4 points)

a. Is the bank rate sensitivity gap positive or negative? Explain why

b. What is the size of this bank rate gap?

c. If the short-term interest rates rise by 5 percent by what amount will the bank profit increase or decrease?

d. What action should the bank take to reduce the interest-rate risk? Explain

e. If the short-term interest rates fall by 5 percent, by what amount will the bank profit increase or decrease?

f. What action should the bank take to reduce the interest-rate risk? Explain

g. If you consider interest rate swaps to hedge interest-rate risk, given your balance sheet, how would you trade interest payments? Explain

h. A bank that expects interest rates to increase in the future will want to hold more of rate -sensitive assets and fewer rate- sensitive liabilities




1. which of the following would be counted as gross domestic

investment?


  • GM issues 1 million shares of stock



  • consolidated construction purchases 1,000 acres of land for a


regional shopping center it plans to build in a few years.


  • a walmart store adds 1,000 T-shirts to ti's


inverotry


  • A college buys computers for it's office staff



  • you and your significant other buy a house



  • you put money into a saving accountÂ









2. a car company currently has a capital stock of $100 million

and desires a capital stock of $110 million


a. if it experiences no depreciation how mch will it need to

invest to get to its desired level of capital stock

b. if its annual depreciation is 5% how much will it need to

invest to get to its desired level

c. if its annual depreciation is 10% how much will it need to

invest to get to its desired level









3. use the information below to compute the levels of gross and

net private domestic investment data are in billions of dollars

a. change in business inventories $59.3

b. residental cinstruction 369.6

c. producers durable equipment 691.3

d. nonresidential structures 246.9

e. depreciation 713.9



4. complete the table which shows investment in the united

states in billions of 2000 chained dollars


year 2005 gross domestic investment 1,873.5 depreciation 1,266.6 net private domestic investment ?

year 2006 gross domestic investnment ? depreciation 1,2161 net priavte domestic investment 696.4

year 2007 gross domestic investment 1,809.7 depreciation ? net priavate domestic investment 546.7










5. which of the following is part of M1 and M2

a. $0.27 that has accumulated under a couch cushion

b. your $2,000 line of credit with your visa account

c. $210 balance in your checking account

d. $417 in your savings account

e. 10 shares of the recently issued facebook stock that your

grandma gave you

f. $200 in travelers checks you purchased before your summer

trip to italy









6. suppose a banks balance sheet looks as follows:



assets


reservers

$2,700




property

$ 4,500


liabilities

deposits $7,200


and banks the reserve requirement is 20 percent

a. how much is excess reserves ratio 20 percent

b. how much can this bank lend






7. suppose a bank A with 25% reserve requirement has $50 million

in reserves and $200 million in checkable deposits one of the banks

depositors a major corporation writes a check to another

corporation for $5 million the check is deposited in another bank

(bank B)

a. explain how the withdrawl affects the banks reserves and

checkable deposits

b. by how much must bank A have to reduce lending?






8. assume the bank of america has access reserves of $30

milllion and outstanding transaction (checking) deposits of $180

million if the reserve ratio is 10% what is the size of the bank of

america total reserves?






9 banks fail when all depositors try to withdraw money at the

same time one way to prevent this problem would be to require bank

to hold 0 of deposits on hand

a. why would this not be desirable thing to do

b. what would happen to the banking system

c. explain how the law which requires banks to purchase fdic

insurance makes 100% reserve system unnecessary.



Please read the passage and answer the questions below.

During the first half of the 2000s, the Japanese yen was relatively weak against the U.S. dollar. This was a boon for Japan’s export-led economy. On January 1, 2008, it took 122 yen to buy one U.S. dollar. For the next four years, the yen strengthened relentlessly against the dollar, hitting a record high of ¥75.31 to the dollar on October 31, 2011. The reasons for the rise of the yen were complex and had little to do with the strength of the Japanese economy because there has been very little of that in evidence. The weakness of the yen during the early to mid-2000s was due to the so-called carry trade. This financial strategy involved borrowing in Japanese yen, where interest rates were close to zero, and investing the loans in higher-yielding assets, typically U.S. Treasury bills, which carried interest rates 3 to 4 percentage points greater. Investors made profits from the interest rate differential. At its peak, financial institutions had more than a trillion dollars invested in the carry trade. Because the strategy involved selling borrowed yen to purchase dollar-denominated assets, it drove the value of the yen lower. The interest rate differential existed because the Japanese economy was weak, prices were falling, and the Bank of Japan had been lowering interest rates in an attempt to boost growth and get Japan out of a dangerous deflationary cycle. When the global financial crisis hit in 2008 and 2009, the Federal Reserve in the United States responded by injecting liquidity into battered financial markets, effectively lowering U.S. interest rates on U.S. Treasury bonds. As these fell, the interest rate differential between Japanese and U.S. assets narrowed sharply, and the carry trade became unprofitable. Financial institutions unwound their positions, selling dollar-denominated assets, and buying yen to pay back their original loans. The increased demand drove up the value of the yen. For Japanese exporters, the 40 percent increase in the value of the yen against the dollar (and the euro) between early 2008 and 2012 was a painful experience. A strong yen hurts the price competitiveness of Japanese exports and reduces the value of profits earned overseas when translated back into yen. Take Toyota as an example: In February 2012, the company stated that its profit for the year ending March 31, 2012, would be about ¥200 billion, 51 percent lower than in the prior year. Toyota makes nearly half of the cars it sells globally at its Japanese plants, so it has been particularly hard hit by a rise in the value of the yen. In late 2012, things started to change when the pro-business Liberal Democratic Party won national elections and Shinzo Abe was appointed prime minister. Abe had campaigned on a platform that included taking actions to weaken the value of the yen to help Japan’s exporters. Even before the election, Japan’s central bank had accelerated purchases of government securities, thereby expanding the money supply, and had agreed to a higher inflation target. Under Abe’s leadership, this policy had explicit government support. One consequence of the policy was to reduce the value of the yen against other currencies. Indeed, between October 2012 and December 2013, the yen lost more than 25 percent of its value against the U.S. dollar. The yen was trading at ¥104 to the U.S. dollar in late December 2013. While this helped Japan’s exporters, the policy was criticized by other major industrial nations as a unilateral action that came dangerously close to precipitating a currency war.

1. Who in Japan benefits from the devaluation of the yen? Who does this hurt in Japan?

2. What does this case teach you about the way foreign exchange markets work?

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