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MGT411 Assignment No 02 Solutoin & Discussion DUE DATE: 8TH JANUARY, 2013

Question No. 1:
a) You are a bank manager and given the responsibility to manage the liquidity risk being faced by the bank. The Balance Sheet of the bank is given below:
Table: Balance sheet of a bank holding no excess reserves
Assets (in Million)
Liabilities (in Million)
Reserves Rs.15 million
Deposits Rs.90 million Rs.100million
Loans Rs.95 million
Borrowed funds Rs.35 million
Securities Rs.35 million
Bank capital Rs.20 million
A customer demands Rs.5 million cash withdrawals from the bank; what changes in the above Balance Sheet will occur if you decide to manage the liquidity risk through:
1. Adjusting assets by:
a. Selling the securities
b. Reducing the loans
2. Adjusting liabilities by:
a. Borrowings
b. Attracting deposits
Note: You are required to prepare four different Balance Sheets for each of the above mentioned strategies. (10 marks)
b) Discuss why bankers prefer liability management over asset management in order to mitigate liquidity risk? (5 marks)
Question No. 2:
a) You, as a bank manager, are managing the bank’s assets and liabilities in such a way that interest rate the bank has to pay on its liabilities is 4% while interest rate the bank charges on its various assets is 6%. Suppose 30% of the bank’s assets fall into the category of interest-sensitive while others are not sensitive to the changes in interest rate. Similarly, half of the bank’s liabilities are interest-sensitive while rests of the half are not. What will be the impact on the profitability of the bank if the interest rate rises by 1% on all assets and liabilities of the bank? (10 marks)
b) What will be the impact of increase in interest rate on the profitability of the bank if the bank has more interest-sensitive liabilities than interest-sensitive assets? (5 marks)

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Replies to This Discussion

Question No. 01

You are a bank manager and given the responsibility to manage the liquidity risk being faced by the bank. The Balance Sheet of the bank is given below:

Table: Balance sheet of a bank holding no excess reserves

Assets (in Million)

Liabilities (in Million)

Reserves Rs.15 million

Deposits Rs.90 million Rs.100millio n

Loans Rs.95 million

Borrowed funds Rs.35 million

Securities Rs.35 million

Bank capital Rs.20 million

 

 

 

 

 A customer demands Rs.5 million cash withdrawals from the bank; what changes in the above Balance Sheet will occur if you decide to manage the liquidity risk through:

  1. Adjusting assets by:
  2. Selling the securities

Ans. Less 5 Million securities on asset side and withdraw 5 million deposits

b. Reducing the loans

 

Ans.  Reduce the loan by 5 Million on asset side

 

 

2. Adjusting liabilities by:

a. Borrowings

Ans. Add borrowed Funds by 5 Million and withdraw 5 million deposit

  1. Attracting deposits

Ans. The same balance sheet which is given in question

 

Note: You are required to prepare four different Balance Sheets for each of the above mentioned strategies. (10 marks)

Liquidity risk is the risk that a business will have insufficient

funds to meet its financial commitments in a timely manner.

The two key elements of liquidity risk are short-term cash

flow risk and long-term funding risk. The long-term funding

risk includes the risk that loans may not be available when

the business requires them or that such funds will not be

available for the required term or at acceptable cost.

All businesses need to manage liquidity risk to ensure that

they remain solvent.

How to Manage... find the attachment

Liquidity risk is the risk that a business will have insufficient

funds to meet its financial commitments in a timely manner.

The two key elements of liquidity risk are short-term cash

flow risk and long-term funding risk. The long-term funding

risk includes the risk that loans may not be available when

the business requires them or that such funds will not be

available for the required term or at acceptable cost.

All businesses need to manage liquidity risk to ensure that

they remain solvent.

How to Manage... find the attachment

What is liquidity risk?

There are two kinds of liquidity: market liquidity, and funding liquidity.

A security has good market liquidity if it is “easy” to trade, that is, has a low bid-ask spread, small price impact, high resilience, easy search (in OTC markets).
A bank or investor has good funding liquidity if it has enough available funding from its own capital or from (collateralised) loans.
With these notions in mind, the meaning of liquidity risk is clear.

Market liquidity risk is the risk that the market liquidity worsens when you need to trade.
Funding liquidity risk is the risk that a trader cannot fund his position and is forced to unwind.
For instance, a levered hedge fund may lose its access to borrowing from its bank and must sell its securities as a result. Or, from the bank's perspective, depositors may withdraw their funds, the bank may lose its ability to borrow from other banks, or raise funds via debt issues.

Liquidity risk is the risk that a business will have insufficient

funds to meet its financial commitments in a timely manner.

The two key elements of liquidity risk are short-term cash

flow risk and long-term funding risk. The long-term funding

risk includes the risk that loans may not be available when

the business requires them or that such funds will not be

available for the required term or at acceptable cost.

All businesses need to manage liquidity risk to ensure that

they remain solvent.

How to Manage... find the attachment

Attachments:

Ma na ese hi sari adjustment ki ha balance sheet ma lekin phr b 5 ka difference aa ra ha.Assets Rs.135 or Liabilities Rs.140 aa ra ha both the side not equal plz help me for this problem

loans walai main araha hoga na 

plz mje solution send kr do koi.

Question # 2 ka (a) part handouts page 83 py jo example di hy usi trah solve ho ga???????????????? Am i right ??????????

10 marks ka qustion hai tou phir kya calculations karni hai

agar pg83 ki tarh say karna hai

MGT 411
Assignment 2 Solution

Table: Balance Sheet of a bank holding no excessive reserves

Assets

Liabilities

Reserves Rs.15

Deposits Rs.90

Loans Rs.95

Borrowed funds Rs.35

Securities Rs.35

Bank Capital Rs.20

A Customers demands RS.5 million cash withdrawal from the bank
1-Adjusting Assets

Table: Balance Sheet of a bank holding no excessive reserves

A)Withdrawal is met by Selling the securities

Assets

Liabilities

Reserves Rs.15

Deposits Rs.85

Loans Rs.95

Borrowed funds Rs.35

Securities Rs.30

Bank Capital Rs.20

 

Table: Balance Sheet of a bank holding no excessive reserves

B)Withdrawal is met by reducing the loan

Assets

Liabilities

Reserves Rs.15

Deposits Rs.85

Loans Rs.90

Borrowed funds Rs.35

Securities Rs.35

Bank Capital Rs.20




2-Adjusting liabilities

Table: Balance Sheet of a bank holding no excessive reserves

A)Withdrawal is met by borrowing

Assets

Liabilities

Reserves Rs.15

Deposits Rs.85

Loans Rs.95

Borrowed funds Rs.40

Securities Rs.35

Bank Capital Rs.20

 

Table: Balance Sheet of a bank holding no excessive reserves

B)Withdrawal is met by attracting deposits

Assets

Liabilities

Reserves Rs.15

Deposits Rs.90

Loans Rs.95

Borrowed funds Rs.35

Securities Rs.35

Bank Capital Rs.20

sparrow but 2 amounts di hui han deposits ki to kya hum ny bs ak he use krni h

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