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ET CBRM Paper

This document contains an exam for a course in commercial banking and risk management. It includes 4 questions: 1) Calculating duration and the effects of interest rate changes on returns for a bank's portfolio. 2) Determining the effect of interest rate movements on the bank's net worth. 3) Explaining the securitization process and which tranche would be best for an investor. 4) Explaining a sample yield curve and how it can help a bank manage profitability.

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Rajas G Ganjave
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39 views3 pages

ET CBRM Paper

This document contains an exam for a course in commercial banking and risk management. It includes 4 questions: 1) Calculating duration and the effects of interest rate changes on returns for a bank's portfolio. 2) Determining the effect of interest rate movements on the bank's net worth. 3) Explaining the securitization process and which tranche would be best for an investor. 4) Explaining a sample yield curve and how it can help a bank manage profitability.

Uploaded by

Rajas G Ganjave
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Institute of Rural Management Anand

Course Name: Commercial Banking and Risk Management Programme: PGDM-RM41

Date: 07/11/2021 Term: IV Roll No: ______________

End Term Examination (Closed Book)

Duration of Exam: 2 Hours Weightage: 40 % Total Marks: 50

1. Ala Bank and Bala Bank, has a portfolio of loans and securities expected to generate cash
inflows for the bank as follows:

Expected Cash Receipts Period in Which Receipts Are Expected

$1,385,421 Current year


746,872 Two years from today
341,555 Three years from today
62,482 Four years from today
9,871 Five years from today

Deposits and money market borrowings are expected to require the following cash
Outflows:

Expected Cash Payments Period in Which Payments Will be Made

$1,427,886 Current year


831,454 Two years from today
123,897 Three years from today
1,005 Four years from today
----- Five years from today

(P.T.O)
a. If the discount rate applicable to the above cash flows is 8 percent, what is the duration
of the bank's portfolio of earning assets and of its deposits and money market
borrowings? What will happen to the bank's total returns, assuming all other factors
are held constant, if interest rates rise? If interest rates fall? Given the size of the
duration gap you have calculated, what type of hedging should the bank engage in?
Please be specific about the hedging transactions that are needed and their expected
effects. (8)

b. Given the cash inflow and outflow figures for Ala Bank and Bala Bank, what would
happen to the value of Ala's net worth as a result of this movement in interest rates? If
interest rates drop from 8 percent to 7 percent, what happens to Ala's net worth in this
case and by how much in dollars does it change? (7)

2. Explain the securitization process in detail. As a risk averse investor, which tranche in the
securitization process would you want to invest your money in? Explain. (6+4 = 10)

3. Please see the graph below:

Please explain the yield curve given above. Explain how this yield curve helps a bank
manage profitability in a general case scenario. (5)

(P.T.O)
3. Write a Short Note on the following: (5*3=15)
a. Credit Swaps
b. Standby Credit Agreement
c. Capital Adequacy Ratio in BASEL II

4. Lakshmi Bank has recorded the following financial data for the past three years (Rs. in
lakhs):

Current Year Previous Year Two Years Ago

Interest revenues 57 56 55

Interest expenses 49 42 34

Loans (Excluding nonperforming) 411 408 406

Investments 239 197 174

Total deposits 487 472 467

Money market borrowings 143 118 96

Calculate the Net interest margins for the bank and advise on the future course of action
For the bank. (5)

_______________________________________

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