Helping Hand Questions for 2016-FRR

Funding liquidity risk and trading liquidity risk are two distinct types of liquidity risks faced by financial institutions, particularly banks.

Funding Liquidity Risk:This type of risk pertains to a bank's ability to meet its financial obligations as they come due without incurring unacceptable losses. It primarily concerns the bank's ability to fund withdrawals, meet depositor demands, and other liabilities when they come due. If a bank cannot manage its funding liquidity, it may be forced to sell assets at fire sale prices, which can further deteriorate its financial condition.

Trading Liquidity Risk:This risk, on the other hand, deals with the market liquidity of the bank's assets. It involves the risk of being unable to buy or sell assets at or near their market value due to inadequate market depth or market disruptions. It is more concerned with the bid-offer spreads and the ability to execute trades without significantly impacting the market price of the asset.

Calculate the weighted average of modified durations:

The modified duration of the portfolio is a weighted average of the durations of the individual bonds, where the weights are the proportions of the total portfolio value.

Calculate the total value of the portfolio: $200 MM (3-year floater) + $120 MM (5-year floater) + $50 MM (10-year fixed) = $370 MM.

Calculate the weights for each bond:

3-year floater: $200 MM / $370 MM = 0.5405

5-year floater: $120 MM / $370 MM = 0.3243

10-year fixed: $50 MM / $370 MM = 0.1351

Multiply each bond's weight by its modified duration and sum the results:

(0.5405 * 0.25) + (0.3243 * 0.25) + (0.1351 * 8) = 0.1351 + 0.0811 + 1.081 = 1.297

Therefore, the weighted average modified duration is approximately 1.30.

ReferencesCalculation based on standard formula and weights derived from the table.

For American options, exercising an in-the-money call option before the ex-dividend date can be beneficial if the option is deep in the money and the dividend is significant. This is because the holder would receive the dividend payment, which can make early exercise profitable.

Option A:The loss data entry must include the actual loss amount.

Correct as it ensures accurate financial impact recording.

Option B:The loss data program must comprehensively capture all material activities.

Correct, necessary for a thorough risk management program.

Option C:The loss data entry should only include the date when the event was reported.

Incorrect, as it is essential to capture both the event date and the report date to understand the timeline of the incident.

Option D:The loss data entry may include descriptive information about the drivers or causes of the loss event.

Correct, as it provides context and insights into the root causes, aiding in risk analysis and prevention.