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ACFI 450 Application Problem Set 4 Spring 2024

Due by 11:59 PM on Wednesday, April 10, 2024

Record your responses to the questions in a Word or PDF file named YourLastName_APS4. If you choose

to perform your calculations in Excel, you may also submit your calculations in an Excel file also named

YourLastName_APS4. Your Excel file SHOULD NOT CONTAIN WRITTEN RESPONSES; it should ONLY

CONTAIN CALCULATIONS. Your responses should be free of grammar, spelling, and punctuation errors.

Upload and submit your file using the Application Problem Set 4 drop box by the deadline.

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)