Individual Assignment for Bank Financial Management (BANK 3011)

Semester 2, 2017

Due Date: The Assignment is to be submitted no later than 11 October 2017 1 pm.

Total Marks for the Assignment: The assignment will be marked out of 100. The marks for each Part and each Question are shown below.

In answering each of the questions below you should show your workings and write your answer using a Word document.

Assignments must be submitted (Word document) electronically via Turnitin on LMS.

Your assignment should include your own cover page (do not use the cover page template) indicating your name, student number and tutorial class and time and your tutor’s name. Your report, including the Executive Summary but excluding the cover page and the Appendices, should be no longer than 1500 words, but may be shorter. You should provide full references to all sources used in your assignment.

The Balance Sheet for Well-done Bank Australia (Well-done) as at 30 June 2017 is shown below in Table 1. Well-done is an Authorized Depository Institution and operates both retail and investment banking operations in Australia. Well-done’s assets and liabilities are exclusively domiciled in Australia and hence it does not have any foreign exchange risk. Welldone is known for its conservative approach towards risk-taking.

BUSINESS SCHOOL

BANK 3011 (Bank Financial Management) Semester 2, 2017

Individual Assignment

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You are Well-done’s Head of Risk Management. You are required to write a report addressing the questions set out below and provide your recommended strategies to manage the Bank’s risks as at 30 June 2017. The intended audience for your report is the senior management team of your bank.

Question 1 (10 marks)

(a) Calculate the Repricing Gap over the 12 month time period from 30 June 2017.

(b) What is the impact on the bank’s earnings as a result of a 1% increase in interest rates using the results in (a) above?

(c) Do you consider that the result in (b) is useful in assessing the bank’s risk exposure? Give reasons identifying any alternative approaches or enhancements that could be used.

Question 2 (15 marks)

(a) Calculate the Duration of the assets and liabilities subject to interest rate risk and the Leverage Adjusted Duration Gap based on market interest rates as at 30 June 2017. Market interest rates should be sourced from the ‘statistics’ section on the RBA website [http://www.rba.gov.au/statistics/tables/].

(b) What is the estimated change in the market value of equity as a result of a 1% increase in interest rates across the board using the Duration model? Compare your answer with that in Q1 (b) and explain any differences between the results. (Word limit: 300 words)

(c) What are the key assumptions on which the assessment of interest rate risk in your answers in (a) and (b) are based? To what extent do you consider that these assumptions limit the usefulness of the results?

BUSINESS SCHOOL

BANK 3011 (Bank Financial Management) Semester 2, 2017

Individual Assignment

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Question 3 (10 marks)

You have assessed that Well-done’s portfolio volatility is highly correlated to 3-year Commonwealth Government securities. Source data from the RBA website [spreadsheet: Capital Market Yields] for the period 1-July-2016 to 30- June-2017 and calculate the daily PAMY at a 95% confidence interval assuming a normal distribution.

Question 4 (10 marks)

What is Well-done’s DEAR?

Question 5 (20 marks)

What strengths and weaknesses are there in the approach used to arrive at the answer to Q4? In assessing this you should consider the extent to which this measurement will assist the bank’s management in assessing the portfolio’s risk profile. (Word limit: 500 words)

Part B [35 marks]

The bank has assessed the credit risk on the loan portfolio to be larger than desired. What specific actions would you recommend to manage this risk and how will these affect the bank’s risk position? Give reasons. (Word limit: 600 words)

Additional Instructions

All workings should be shown and included in Appendices in your report. These will not be included in the word limits set out above.

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