End Term Exam Solution Sample

Asset Liability Management

End Term Exam Solution

Answer 1 –

	31-Dec-10	31-Dec-11	31-Dec-10	31-Dec-11
Assets
Surplus funds				$7.12
Money with Central Bank (CRR of 6%)	6%	6%	$4.20	$5.13
Government of India Securities (SLR of 25%)	25%	25%	$17.50	$21.38
Interbank Loans	$15.00	5%	$15.00	$15.75
Corporate Loans	$38.30	10%	$38.30	$42.13
Retail Loans	$20.00	15%	$20.00	$23.00
Fixed Assets	$5.00		$5.00	$5.50
Total Assets			$100.00	$120.00
Liabilities
Need to fund				$0.00
Interbank depos	$10.00	5%	$10.00	$10.50
Retail Deposits	$60.00	25%	$60.00	$75.00
Senior	$5.00	0%	$5.00	$5.00
Sub Debt	$10.00	0%	$10.00	$10.00
Equity	$15.00		$15.00	$19.50
Total Liabilities			$100.00	$120.00
TA-SF			$100.00	$112.89
TL-NTF			$100.00	$120.00
Dff				$7.12
Capex		$1.00		$1.00
Income Statement	12/31/2010	12/31/2011	12/31/2010	12/31/2011
Revenues
Interest Income from Surplus funds		5.50%		$0.20
Interest Income from Money with Central Bank (CRR of 6%)		6.00%		$0.28
Interest Income from Government of India Securities (SLR of 25%)		7.50%		$1.46
Interest Income from Interbank Loans		7.00%		$1.08
Interest Income from Corporate Loans		14.00%		$5.63
Interest Income from Retail Loans		15.00%		$3.23
Fee based Income	$2.00	20.00%	$2.00	$2.40
Total Revenues				$14.26
Cost
Interest Cost for Need to fund		5.50%		$0.00
Interest Cost for Interbank depos		7.00%		$0.72
Interest Cost for Retail Deposits		5.00%		$3.38
Interest Cost for Senior		12.00%		$0.60
Interest Cost for Sub Debt		13.00%		$1.30
Total Interest Cost				$5.99
Operating Expenses	$1.00	10%	$1.00	$1.10
Depreciation		10%		$0.50
PBT				$6.67
Corporate Tax		25%		$1.67
Net Income				$5.00
Dividends		10%		$0.50
Net Addition to Retained Earnings				$4.50

Answer 2 & 3 –

Solution to ALM Interest Rate Management

		1%
Mod Dur	DF'	Shift_ZC	DF	ZCYC
0.9398	0.9311	7.4000%	0.9398	6.4000%
1.8709	0.8589	7.9000%	0.8751	6.9000%
3.7209	0.7216	8.5000%	0.7488	7.5000%
6.4815	0.5470	9.0000%	0.5835	8.0000%

4.0699	4.3846	3.8287
	IFCI	Book Value
	Liabilities	Assets
1	1500	4000
2	3500	3500
4	2500	1500
7	5500	7000
	13000	16000

Economic Value			Econ Value
Liabilities	Assets		Liabilities	Assets
1409.77	3759.40		1396.65	3724.39
3062.76	3062.76		3006.25	3006.25
1872.00	1123.20		1803.94	1082.36
3209.20	4084.43		3008.69	3829.24
9553.73	12029.79		9215.52	11642.25
	2476.06		-49.34	2426.72
			338.21	387.54
Change			3.54%	3.22%
Modified Duration			3.54	3.22

Solution to ALM Credit Risk

Notional	Spread	LGD	PD
50.00%	3.00%	60.00%	5.00%
50.00%	2.00%	50.00%	4.00%

		Equity	Mezzanine	Senior
	Returns	8.800%	5.300%	0.050%
		0.880%	1.590%	0.030%
		10%	30%	60%
91.2000%	0%	0%	0%	0%
4.8000%	30%	10%	20%	0%
3.8000%	25%	10%	15%	0%
0.2000%	55%	10%	30%	15%

Answer 4 & 5 –

Solution to ALM Market Risk –

	Spot	USD Interest Rate	INR Int Rate	99% Value from MC Sim	95% Value from MC Sim
	46.00	0.75%	6%	36.55	40.53
Notional	$500,000,000.00
99% confidence Level	-11.85	Rs. -5,923,511,166.25	-9.45	Rs. -4,725,000,000.00
95% confidence Level	-7.87	Rs. -3,933,511,166.25	-5.47	Rs. -2,735,000,000.00

5 marks for the following steps –

Step-1	Borrow USD equivalent of	$496,277,915.63
Step-2	Convert at Spot Rate 46.25	Rs. 22,828,784,119.11
Step-3	Lend at 6%	Rs. 24,198,511,166.25
	Equivalent Exchange Rate	48.40

Solution to ALM Capital Adequacy

Assets		Liabilities
Reserves with Central Bank	60	Demand Deposits	750
Mortgage Loans	525	Term Deposits	450
Corporate Loans	450	Interbank Deposits	370
Interbank Loans	375	Subordinated Debt	25
Government Bonds	195	Equity	55
Fixed Assets	45
Total	1650	Total	1650

Risk-Weights	Risk-Weighted Assets
0%	0
50%	262.5
100%	450
20%	75
0%	0
100%	0
	787.5
Tier-I Capital	55
Tier-II Capital	25
Tier-I Capital Ratio	6.98%
Tier-II Capital Ratio	3.17%
Total	10.16%