14 Apr A bank’s customer wants to exercise a $2,980,000 loan commitment
1. A bank’s customer wants to exercise a $2,980,000 loan commitment. Show the balance sheet after
the loan is established using stored liquidity to fund the loan. (6 points)
Assets Liabilities and Equity
Cash $1,930,500 Deposits $17,900,000
Loans 12,873,400 Equity 4,553,900
Securities 7,650,000
Total Assets $22,453,900 Total Liabilities and Equity $22,453,900
2. A bank has the following balance sheet. It expects a net deposit drain of $7,890,000. Show the
bank’s balance sheet if it used purchased liquidity to offset the expected drain. (6 points)
Assets Liabilities and Equity
Cash $2,136,300 Deposits $23,986,300
Loans 22,870,400 Equity 8,770,400
Securities 7,750,000
Total Assets $32,756,700 Total Liabilities and Equity $32,756,700
3. A bank has $27 million in cash and equivalents, average loans of $110 million and average deposits
of $93 million. (3 points each)
a. Calculate the bank’s financing gap.
b. Suppose the bank’s financing gap was $15 million yesterday. What does the difference between
today’s financing gap and yesterday’s financing gap indicate to the bank about its liquidity
position?
c. Calculate the bank’s financing requirement.
d. What does the bank’s financing requirement mean for the bank? How will it use this information
to manage its liquidity?
4. A commercial bank has provided the following financial information.
Average daily net transaction accounts balance during the reserve computation period
$ 2,945.00 M
Average daily reserves held with the Federal Reserve during the reserve maintenance period
204.56 M
Average daily vault cash during the reserve maintenance period 87.54 M
a. Calculate the bank’s target reserve using the requirements prior to January 2020. (6 points)
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b. Calculate the amount of reserves that the bank must maintain with the Federal Reserve
assuming vault cash does not change during the maintenance period based on the
requirements prior to January 2020. (4 points)
c. Is the bank undershooting or overshooting the reserve target? Support your response. (4
points)
5. A U.S.-based commercial bank has the following assets and liabilities.
Assets Liabilities
$200 M 1-year U.S. loans (made in U.S.
dollars)
$300 M 1-year U.S. CDs (made in dollars)
$500 M equivalent 1-year Japanese loans
(made in yen)
$400 M 1-year Japanese CDs (made in yen)
a. Explain whether the bank’s asset position is net long or net short in yen. (4 points)
b. Is the bank more likely to be concerned about the appreciation or depreciation of the yen
relative to the U.S. dollar? Why? (6 points)
c. How could the bank arrange an on-balance-sheet hedge for its foreign exchange rate risk? Be
sure to explain how the hedge helps the bank address its risk in your response. (4 points)
6. A U.S.-based insurance company invested $6,750,000 in a euro-denominated security when the
exchange rate was $1.22/€. The exchange rate is now $1.08/€.
a. Explain whether the U.S. dollar has appreciated or depreciated against the euro. (4 points)
b. Calculate the return on the investment for the insurance company based only on the change in
the exchange rate. (10 points)
7. A U.S.-based insurance company owns a Mex$10,000,000 corporate bond and has Mex$4,000,000
of claims reserves. It has also bought Mex$2,000,000 and sold Mex$3,000,000. The current
exchange rate is $0.059/Mex$. (Mex$ indicates Mexican pesos.)
a. Calculate the bank’s dollar net exposure to Mexican pesos. Note that your answer should be in
U.S. dollars. (10 points)
b. If the dollar-per-Mexican peso exchange rate decreases by 11%, what is the bank’s dollar
expected gain or loss? (6 points)
c. What position in a forward contract based on Mexican pesos could the insurance company take
to hedge its foreign exchange rate risk? Be sure to explain how this position will hedge the
insurance company’s risk in your response. (4 points)
