(fylls i av ansvarig) Datum för tentamen Sal. Financial Markets and Financial Institutions, Risk Management Institution

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1 AID-kod: Daum: -- Blad nr: Kurskod: 7G rovkod: EXA Försäsblad ill skriflig enamen vid Linköpings Universie (fylls i av ansvarig) Daum för enamen -- Sal ER id 8- Kurskod 7G rovkod EXA Kursnamn/benämning Financial Markes and Financial Insiuions, Risk Managemen Insiuion IEI/Naionalekonomi Anal uppgifer som 5 (Number of quesions) ingår i enamen Anal sidor på enamen (inkl. 5 (Number of pages incl formula shee) försäsblade) Jour/Kursansvarig Bo Sjö elefon under skrivid -86 Besöker salen ca kl. 9:5 Kursadminisraör (namn fnnr mailadress) Chrisina Svensson ank 54 chrisina.svensson@liu.se illåna hjälpmedel Minräknare Calculaor Övrig (exempel när resula kan ses på webben, beygsgränser, visning, övriga salar enan går i m.m.) Maximum marks in his exam are 6. ass requires marks.

2 AID-kod: Daum: -- Blad nr: Kurskod: 7G rovkod: EXA Quesion ( marks) Give brief definiions of he following quesions: a) Wha is ineres rae risk? How is refinancing risk differen from reinvesmen risk? b) Wha is marke risk, and why is i relevan for banks? c) Name a few aciviies ypical for an invesmen bank? d) FRA e) Wha is mean by off-balance shee risks? Give wo examples. Quesion ( marks) a) Financial Insiuions enable a smooh flow of funds from household savers o corporae users. Explain wha Financial Inermediaries do ha households find oo cosly or oo difficul o do on heir own? b) Explain credi raioning c) Wha are agency coss? Quesion ( marks) here are many ypes of financial crises, a leas five differen. Define each of hem and exemplify wih shor empirical illusraions from various counries. Quesion 4 (4 marks) a) Briefly explain he differences beween forwards, fuures and opions. b) Wha is mean by a cap and a floor? c) Calculae he value of a four-year, wih face value $, bond ha pays an annual coupon of 5 per cen and rades a a yield of 4 percen. d) If he yield curve makes an upward shif so ha he four-year zero coupon governmen bond would sell a 6%, how would ha affec he price of he bond in quesion c? e) Explain wha is a yield curve, and why migh i change upwards?

3 AID-kod: Daum: -- Blad nr: Kurskod: 7G rovkod: EXA Quesion 5 (6 marks) (In his quesion ignore convexiy and decimals when calculaing values of asses and liabiliies.) Consider he following sylized balance shee (in millions of a marke value) for a Financial Firm: Asses? Loan porfolio wih duraion 6.5 years, YM on he loan is 4% Liabiliies and Owner s Equiy i),, wo-year annual coupon bonds, wih nominal value,, coupon %, rading a %. ii),, Oneyear, zero coupon Cerificae of deposis, nominal value,, rading a % iii) Equiy value 4.7m a) Wha is he value of he single wo year bond on he liabiliy side above? Wha are he duraion and he modified duraion of his bond? b) If he ineres rae goes up wih.5 % how much would he value of he wo year bond change (approximaely)? c) Wha is he duraion of he oal liabiliies? d) Wha is he value of he FI:s Asses (Loan orfolio)? e) Wha is he FI's duraion gap? Discuss how can he gap be closed? f) Wha happens wih he equiy value if he ineres rae were o go up wih %? g) Wha is he VaR for he FI s equiy, for five days, calculaed for he 5 % poenial adverse (bad) moves in he ineres raes? he expeced change in he ineres rae is zero, and he sandard deviaion is 7 basis poins?

4 AID-kod: Daum: -- Blad nr: 4 Kurskod: 7G rovkod: EXA -- Formula Shee for EXAM he presen value ( ) of a single fuure cash flow ( ) occurring a he fuure ime, = he can also be wrien as ( r) = = = DF, ( r) ( r) DF = / r is he discoun facor for he presen value of he cash flow a ime. where ( ) he presen value of a series of fuure he cash flows going from period o, =... ( r) ( r) ( r) ( r) = ( r) ( r) =. resen Value of an Annuiy (a series of consan cash flows ( ) over a fixed ime) = = = ( r) r r( r) Value of a Bond, wih given fixed coupons and yield, ime o mauriy. = = FV ( y) ( y) Duraion D = DF, = where is he price (value) of he bond oday. Modified duraion D MD = r ( )

5 AID-kod: Daum: -- Blad nr: 5 Kurskod: 7G rovkod: EXA Value change in bonds (), asses (A) or liabiliies (L), due o change in ineres rae ( r) = D r ( r) Change in equiy value from E = A L, E = DEAR [ D D k] A L A r ( r) ( r) DEAR = Marke Value rice sensiviy(d) (Adverse move in yield)/ DEAR can be for a porfolio of bond liabiliies, bond asses, or equiy from a combinaion of loans and bond liabiliies.. Adverse move ˆ µ ± η ˆ σ A normally disribued random variable x, wih mean = µ x, and sandard deviaion = σ x, has confidence inervals given by ˆ µ ± η ˆ σ, where η ypically can ake he following values.645,.96,. and.575, which represens, 5, and percen risk levels. VaR VaR = DEAR N Implici Forward ( f ) = ( r ) ( r ) where r is he yield oday a ime =, on a zero coupon bond wih wo-year o mauriy, r is he one year ineres rae deermined oday a ime = (=he yield of a one-year zero coupon bond), and f is he implici forward rae for year.