2016-FRR Exam Dumps - Financial Risk and Regulation (FRR) Series

To calculate the 12-month futures price for Unico Delta stock, we use the formula for pricing equity futures, considering the current stock price, dividend yield, and the risk-free rate (LIBOR in this case):

𝐹=𝑆×𝑒(𝑟−𝑑)𝑡F=S×e(r−d)t

Where:

𝐹Fis the futures price

𝑆Sis the current stock price ($20)

𝑟ris the risk-free rate (3% or 0.03)

𝑑dis the dividend yield (5% or 0.05)

𝑡tis the time to maturity (1 year)

Plugging in the values:

𝐹=20×𝑒(0.03−0.05)×1F=20×e(0.03−0.05)×1𝐹=20×𝑒−0.02F=20×e−0.02𝐹≈20×0.9802F≈20×0.9802𝐹≈20.04F≈20.04

Therefore, the 12-month futures contract will trade at approximately $20.04.

References

How Finance Works.pdf, p. 206 ​

Under Basel II, Tier 2 capital, also known as supplementary capital, includes:

Subordinated Debt: This type of debt ranks below other debts with respect to claims on assets or earnings. It is considered Tier 2 capital because it can absorb losses in the event of a winding-up of the bank.

Other Instruments: This category can also include hybrid instruments, undisclosed reserves, revaluation reserves, and general provisions/general loan-loss reserves.

These components enhance the bank's ability to absorb losses beyond the protection provided by Tier 1 capital.

Value at Risk (VaR) at a 95% confidence level means that there is a 95% chance that the bank's losses will not exceed USD 10 million in a year. Conversely, this implies that there is a 5% chance that the bank's losses will exceed USD 10 million in a year.

When a bank looks to issue new capital to increase its Tier 1 capital levels, the following instrument is most likely considered:

Convertible Preferred Shares: These shares can be converted into common stock. They are considered part of Tier 1 capital because they have characteristics of equity, such as absorbing losses while the bank remains a going concern.

Long-term and callable debt, short-term callable debt, and short-term debt convertible to non-cumulative preferred shares do not typically qualify as Tier 1 capital because they do not provide the same level of loss absorption as equity instruments.

Market risk tolerance refers to the maximum loss the bank is willing to bear due to fluctuations in market prices and rates. It defines the extent to which the bank is prepared to accept risk in its operations and investment strategies, helping to align its risk appetite with its strategic objectives.