Corporate Risk Management: Exam

Using the information above, what is the impact on equity values if all interest rates rise by bops; I. E. , OR/(I+R) = +. 002? (10 points) 2. This bank wishes to hedge its interest rate risk exposure with 10-year Treasury bond futures. A 10-year, 5% coupon Treasury bond (basis for the futures contract) has a duration of 7. 5 years. If 10-year Treasury bond futures contracts currently are selling for $102,000 per contract, what should the bank do to hedge its interest rate risk? We also know that Treasury futures prices move 1. 5% for every 1% change in pot Treasury prices. 10 points) slung ten International In quietest 1 gall, assume ten Dank wellness to engage Day using put options on Treasury bonds where the underlying security has a duration of 6 years. Put option prices decline $. 4 for every $1 move in T bond prices. The current market value of T bonds is $99,000 and assume market interest rates are at 8%. How many put option contracts are needed to hedge the interest rate risk exposure? Do you go long or short? (10 points) 4. Using the Morton default model we determine that the risk-neutral probability of fault for a bond with a maturity of 6 years is 35% and the expected recovery rate is 50%.

Corresponding 1, 6, and 30 year Treasury yields are 1, 2, and 3%, respectively. What is the theoretical credit spread? (7 points) suppose you nave a protocol consisting AT Just 2 Donnas, one rate A Ana ten toner B. The characteristics of both bonds are as indicated in the table below. A-rated Bond Year-end Rating Value ($) Probability (%) 125 115 75 a-rated Bond 8 2 120 5 85 10 For the 2 bond portfolio what is the probability that both bonds are a-rated next period? What is the portfolios value? 7 Points) Show work for full credit. 6.

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You have a $1 B pool of assets with which you wish to create a collateralized default obligation. There are three trenches; a senior, mezzanine and Junior trance. The senior trance is 85% of the pool, and the mezzanine is 10% and Junior trance is 5% of the pool. There are 4 possible default outcomes; as indicated below: Default Scenario Probability 20 . 10 3 4 . 01 The loss severity for each scenario is 50% and the risk-free rate is 4%. A. What is the level of subordination of the senior trance (that is as a percent of the total pool)? What does this mean? (7 Points) b.

Compute the payoffs and losses for each trance for scenario 4 using the table below for your answers (7 Points) Senior Mezzanine Junior Loss Payoff a. Compute the price and yield for the Junior trance. (7 Points) / Assume you nave a S pool AT assets Tanat you own Ana you nave determined that the pool could face one of two scenarios. Scenario 1 has a 20% chance of occurring that will lead to a probability of default of 13. 3%, or scenario 2 that has an 80% chance of happening leading too probability of default of The covers rate on the pool is 70% under scenario 1 and 80% under scenario 2.