1. Money Center Banks:Banks that are heavily reliant on wholesale banking and
fund their lending by borrowing in financial markets are often referred to as money center banks.
2. directed brokerage:Directed brokerage involves an improper arrangement
between a mutual fund and a brokerage house where the brokerage house recommends the mutual fund to clients in return for receiving orders from the mutual fund for stock and bond purchases.
3. asset-backed security:asset-backed security is a security created from the cash
flows of financial assets such as loans, bonds, credit card receivables, mortgages, auto loans, and aircraft leases.
4. Front running:Front running occurs when a mutual fund is planning a big trade
that is expected to move the market. It informs favored customers or partners before executing the trade, allowing them to trade for their own account first. 5. total expense ratio:The total expense ratio is the total of the annual fees charged
per share divided by the value of the share.
6. Moral hazard:Moral hazard is the risk that the behavior of an individual or
corporation with an insurance contract will be different from the behavior without the insurance contract.
7. Average Price Call Option: An option giving a payoff equal to the greater of zero
and the amount by which the average price of the asset exceeds the strike price. 8. Transaction Costs:The cost of carrying out a trade (commissions plus the
difference between the price obtained and the midpoint of the bid-offer spread). 9. Discount Rate:The discount rate is the interest rate used by the future payment
for the present value, or the holder of the bill to the bank for the absence of maturity, and the interest rate for the bank to deduct interest from the used interest rate. This discount rate also refers to the rate of re - discount, that is, the member banks will have discounted bills as collateral, as the interest paid to the central bank loans.
10. Option:Option is also called the option, which is a derivative financial instrument
based on futures.An option is the right to buy or sell a certain amount of certain assets at a specific price in the future at a particular price.
二、回答与计算
1. In the 1970s banks in the United States and other countries lent huge amounts of money to Eastern European, Latin American and other less developed
countries(LDCs). Some of the loans were made to help countries develop their infrastructure, but others were less justifiable
Question：how to keep loans performing from the text?
If payments due from the borrower are more than 90 days past due, the Joan is usually classified as nonperforming. The bank does not then accrue interest on the loan when calculating its profit. When problems with the loan become more serious and it is clear that interest and principal will not be paid, the loan is classified as a loan loss.
A bank creates a reserve for loan losses. This is a charge against the income
statement for an estimate ol the loan losses that will be incurred. Periodically the reserve is increased or decreased. A bank can smooth out its income from one year to the next by over¬estimating reserves in good years and underestimating them in bad years. Actual loan losses are charged against reserves. Occasionally, as described in Business Snapshot 2.3, a bank resorts to artificial ways of avoiding the recognition of loan losses.
2.Is the CDS Market a Fair Game?
There is one important difference between credit default swaps and most other over- the-counter derivatives. The other over-the-counter derivatives depend on interest rates, exchange rates, equity indices, commodity prices, and so on. There is no
reason to assume that any one market participant has better information than other market participants about these variables.
Credit default swaps spreads depend on the probability that a particular company will default during a particular period of time. Arguably some market participants have more information to estimate this probability than others. A financial institution that works closely with a particular company by providing advice, making loans，and handling new issues of securities is likely to have more information about the creditworthiness of the company than another financial institution that has no deal¬ings with the company. Economists refer to this as an asymmetric information problem.
Whether asymmetric information will curtail the expansion of the credit default swap market remains to be seen. Financial institutions emphasize that the decision to buy protection against the risk of default by a company is normally made by a risk
manager and is not based on any special information that may exist elsewhere in the financial institution about the company.
3.When is a trading loss classified as a market risk and when is it classified operational risk?
If a trader operates within established risk limits and takes a loss, this is part of market risk. If risk limits are violated, the loss becomes classified as an operational risk.
4.In June 2001，the Danish Financial Supervisory Authority (DFSA) introduced a\"traffic light\" solvency stress-testing system. This requires life insurance
companies and pension funds to submit semiannual reports indicating the impact on them of certain predefined shocks. Question：What are traffic light options according to the passage? What are their drawbacks?
Traffic light options were options that provided payoffs when the scenarios
considered by insurance company regulators occurred. The danger is that, when it buys a traffic light option, the financial institution is protecting itself against a too narrow range of adverse scenarios. The financial institution might not be protected against a scenario that is similar to, but not exactly the same as, the scenarios covered by the traffic light option.
5.Question: What is the capital asset pricing model?How to deduce the formula?What does this formula show?
The excess expected return over the risk-free rate required on the investment is times the excess expected return on the market portfolio.
6.A corn farmer argues: \"I do not use futures contracts for hedging. My real risk is not the price of corn. It is that my whole crop gets wiped out by the weather.\" Discuss this viewpoint. Should the farmer estimate his or her expected production of corn and hedge to try to lock in a price for expected production?
Suppose that the weather is bad and the farmer’s production is lower than expected. Other farmers are likely to have been affected similarly. Corn production overall will be low and as a consequence the price of corn will be relatively high. The farmer is likely to be overhedged relative to actual production. The farmer’s problems arising from the bad harvest will be made worse by losses on the short futures position. This problem emphasizes the importance of looking at the big picture when hedging. The farmer is correct to question whether hedging price risk while ignoring other risks is a good strategy.
7.Explain why long-term rates are higher than short-term rates most of the time. Under what circumstances would you expect long-term rates to be lower than short-term rates?
If long-term rates were simply a reflection of expected future short-term rates, we would expect the long rates to be less than short rates as often as they are greater than short rates. (This is based on the assumption that half of the time investors expect rates to increase and half of the time investors expect rates to decrease). Liquidity preference theory argues that long-term rates are high relative to expected future short-term rates. This means that long rates are greater than short rates most of the time. When long rates are less than short rates, the market is expecting a relatively steep decline in rates.
8.There are many potential conflicts of interest between commercial banking,
securities services, and investment banking when they are all conducted under the same corporate Umbrella.please write some examples.
1.A bank when asked for advice by an investor might be tempted to recommend securities that the investment banking part of its organization is trying to sell. When it has a fiduciary account (i.e., a customer account where the bank can choose trades for the customer), the bank can ‘‘stufT’ difficult-to-sell securities into the account. 2.A bank when it lends money to a company often obtains confidential information about the company. It might be tempted to pass that information to the mergers and acquisitions arm of the investment bank to help it provide advice to one of its clients on potential takeover opportunities.
3.The research end of the securities business might be tempted to recommend a company’s share as a “buy” in order to please the company’s management and obtain investment banking business.
4.Suppose a commercial bank no longer wants a loan it has made to a company on its books because the confidential information it has obtained from the company leads it to believe that there is an increased chance of bankruptcy. It might be tempted to arrange for the investment bank to do a bond issue for the company, with the proceeds being used to pay off the loan. This would have the effect of replacing its
loan with a loan made by investors who were less well informed.
9.Equitable Life was a British life insurance company founded in 1762 that at its pea had 1.5 million policyholders. Starting in the 1950s, Equitable Life sold annuity products where it guaranteed that the interest rate used to calculate the size of annuity payments would be above a certain level. Question:What does the story want to tell us?
An interesting aside to this is that regulators did at one point urge insurance
companies that offered GAOs to hedge their exposures to an interest rate decline. As a result many insurance companies scrambled to enter into contracts with banks that paid off if long-term interest rates declined. The banks in turn hedged their risk by buying instruments such as bonds that increased in price when rates fell. This was done on such a massive scale that the extra demand for bonds caused long-term interest rates in the UK to decline sharply (increasing losses for insurance companies on the unhedged part of their exposures). This shows that, when large numbers of different companies have similar exposures, problems are created if they all decide to hedge at the same time. There are not likely to be enough investors willing to take on their risks without market prices changing.
10.Suppose that the following is a sequence of returns per annum reported by a mutual fund manager over the last five years (measured using annual compounding):
15%, 20%, 30%，-20%, 25% Question:What conclusions can we get from text?
This phenomenon is an example of a result that is well known by mathematicians. The geometric mean of a set of numbers (not all the same) is always less than the arithmetic mean.
11.Peoplesoft's Poison Pill
In 2003, the management of Peoplesoft, Inc., a company that provided human resource management systems, was concerned about a takeover by Oracle, a company specializing in database management systems.
Question:What is poison pill?Can you give some examples of poison pill?
（毒丸是什么）Pill poison is an ideal weapon for a long time.. Poison pill is the 1982 of the invention of the American famous a mergers and acquisitions lawyer Martin Lipton MartinLipton, formal name is \"dilution of anti takeover measures, initially in the form is very simple, is when the target company to the shareholders of ordinary shares issued preferred stock, once the company is acquired, shares held by the East preferred shares can be converted to a certain amount of the acquisition of shares. The poison pill was planned for the legalization of the Delaware court in 1985.
例子 Poison pill is the famous case of PeopleSoft and Oracle, News Corporation and liberty media group, the krona. Zilaba and goldsmith, and so on
其中一个例子深入 可以不写In 1984, the krona. Zilaba to resist the merger
acquisition of expert goldsmith, developed a set of triple poison pill: a lower dividend; the second is announced new shareholders do not have the right to vote, the board of directors up to a year to replace 1 / 3, any major decisions shall be by the board of directors will, 2 / 3 votes through; three is left, a senior person in charge shall pay the
3 years of salary and pension, for a total of $100 million, turnover, the backbone of the company shall pay the half a year's wages, a total of 30 million dollars.
12.A foreign exchange trader working for a bank enters into a long forward contract to buy 1 million pounds sterling at an exchange rate of 1.6000 in three months. Does the forward trader have a valid complaint?
The answer is no! The daily settlement of futures contracts ensures that the futures trader realizes an almost immediate profit corresponding to the increase in the futures price.
13.Imagine you are the chief risk officer of a major corporation. The CEO wants your views on a major new venture. You have been inundated with reports
showing that the new venture has a positive net present value and will enhance shareholder value. What sort of analysis and ideas is the CEO looking for from you? As chief risk officer it is your job to consider how the new venture fits into the
company’s portfolio. What is the correlation of the performance of the new venture with the rest of the company’s business? When the rest of the business is
experiencing difficulties, will the new venture also provide poor returns, or will it have the effect of dampening the ups and downs in the rest of the business?
Companies must take risks if they are to survive and prosper. The risk management function’s primary responsibility is to understand the portfolio of risks that the
company is currently taking and the risks it plans to take in the future. It must decide whether the risks are acceptable and, if they are not acceptable, what action should be taken.
14.What will make the probability distribution of total default losses positively skewed, as indicated in Figure 15.3 ? Please write down the procedure .
The effect of assuming a probability distribution for the overall default rate is to build in default correlation and make the probability distribution of total default losses positively skewed, as indicated in Figure 15.3. The default correlation arises because, when a high (low) overall default rate is sampled, all companies have a high (low) probability of default. 15、Suppose that each of two investments has a 0.9% chance of a loss of $10 million, a 99.1% of a loss of $1, and 0% chance of a profit. The investments are independent of each other.
(a) What is the VaR for one of the investments when the confidence level is 99%? (b) What is the expected shortfall for one of the investments when the confidence level is 99%?
(c) What is the VaR for a portfolio consisting of the two investments when the confidence level is 99%?
(d) What is the expected shortfall for a portfolio consisting of the two investments when the confidence level is 99%?
(e) Show that in this example VaR does not satisfy the subadditivity condition whereas expected shortfall does.
8.1. (a) $1 million.
(b) The expected shortfall is 0.9 x 10 + 0.1 x 1，or $9.1 million.
(c) There is a probability of 0.0092 = 0.000081 of a loss of $20 million, a probability
of
2 x 0.009 x 0.991 = 0.017838 of a loss of $11 million, and a probability of
0.9912 = 0.982081 of loss of $2 million. The VaR when the confidence level is 99% is therefore SI 1 million.
(d) The expected shortfall is (0.000081 x 20 + 0.009919 x 11)/0.01 = $11.07
million.
(e) Since 1 + 1 < 11, the subadditivity condition is not satisfied for VaR. Since
9.1 + 9.1 > 11.07, it is satisfied for expected shortfall.
16.（两张图片的那个）A five-year bond with a yield of 11%(continuously compounded) pays an 8% coupon at the end of each year. (a) What is the bond's price? (b) What is the bond's duration?
(c) Use the duration to calculate the effect on the bond's price of a 0.2% decrease in its yield.
(d) Recalculate the bond's price on the basis of a 10.8% per annum yield and verify that the result is in agreement with your answer to (c).
17.（一张图片的）A credit default swap requires a semiannual payment at the rate of 60 basis points per year. The principal is $300 million and the credit default swap is settled in cash. A default occurs after 4 years and 2 months, and the calculation agent estimates that the price of the cheapest deliverable bond is 40% of its face value shortly after the default. List the cash flows and their timing for the seller of the credit default swap. 18.Film critic of Wall Street
Life is like a movie, a lot of truth, even if you understand, but can not be used properly. Like cabinets for sale in chess, each pair of chess will be equipped with paper illustrates, however, read the rules does not mean that you can become a chess master.
Not to speak of foreign countries.. China Securities Regulatory Commission annually introduced a number of regulations, the industry insiders insider trading to ensure
fair operation of the market. The reason why so many people competing with insider, this can utilize first-hand information as changeable as clouds and rain in the market. However, the law of the law, the loophole can always get, the Wall Street in the big brother is this summary: in this industry, you do not do insider, is outsiders.\" The film uses a lot of space to depict how the dealer obtains information, spreads rumor, builds the market, plays the retail, the final profit and escape process. If you are an investor, and your information source is mainly a taxi driver, markets aunt figure, then in addition to fend for themselves, you can only recognition of their courage. Or, when confused and disoriented in the stock market, you can go to have a look of the film, and then decide whether to continue to go. The technology to send people daily sit in front of the computer, think can from the trend line, moving average, relative strength index, the turnover in peep out market mystery. And daily $80 million big brother doesn't think so. Their desk also display the colorful charts, but the more become their pastime. More important is, hiring a group of cowboys, pegged to the rival movements: where to dine, and meet the people to where the negotiations... These ordinary people seemingly trivial matters, in the eyes of the chiefs became priceless information, all investment decisions are based on this information in the formulation. Wall Street as a commercial film, of course, can not be confined to expose the stock market unspoken rules, but also must have enough drama to meet the needs of the audience. This movie a bit threadbare: a novice, defected to the industry heavyweights men. At first the saddle before the horse, cap in hand. A run down, not only to learn the skills, and the harvest of wealth, to the satisfaction of all is. Later, interest conflict is inevitable there, the two sides began to retaliation, and eventual progression to yusiwangpo, lose lose. The film there is a scene of Douglas's brother Charlie's new strike violently scene. In my opinion, it is more like a master to disciple nuqibuzheng performance. How cruel reality, find mentors and where? For me, revenge also revenge, gas also out, to the master of the road a modest, whether he forgive or not will not fight against him. This is for a to you everything, not too much to the requirements of it? More importantly, the cruelty of accepting the reality of the more than the myth of a righteous victory over evil can more sublimation theme. Unfortunately, the storyline is not moving in that direction.. The last scene of the film, Charlie Sheen's father in earnest to his son said, to the steadfast work, effectively to create wealth, and not only for the buying and selling of others. This view reflects a different understanding of the economy.. Feed themselves must not rely on the creation of wealth, which has been proved by many successful people in colorful life. As big brother in the film proudly declared: created nothing but, I own things I. Moreover, the commodity in the economic chain every link will increase the value of. For sale is paid labor (labor), labor itself has value. Successful people make their own labor more valuable, do not to find excuses for themselves. The film is out of date.. Finally talk about the actor, has recently been in chasing a series Boston Legal, starring in the film a cameo, when really is pressing youth ah, but vaguely visible glib clues. Charlie Sheen in the mix can be described as rather sad, when a big production after another, now the body sink haggard face, even a decent TV drama can not get out of a department. Thus, the ups and downs of life as the
Wall Street index. Douglas is because the film won the Oscar of, have to say, Zeta Jones to marry him, may not only be, because the old man some indescribable charm of money and power.
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