Sample Paper

ALM Exam SPJCM Singapore 2011 Batch (Vaidyanathan R) (Feb, 2011)

Question 1: Bank Assets & Liabilities – 15 Marks

You are given the following details of a bank and are asked to put together the balance sheet as of 31 December 2011

Calculate the Money with the Central Bank assuming that the bank complies with the CRR requirement of 6% exactly

Calculate the amount of assets invested in Government of India Securities assuming that the bank complies with SLR requirements of 25% exactly

Calculate the book equity value of the bank assuming that the addition to retained earnings is as given in the income statement

Bank Balance Sheet

	31-12-2010	31-12-2011
Assets
Surplus Funds	$0.00	$7.12
Money with Central Bank (CRR of 6%)	$4.20
Government of India Securities (SLR of 25%)	$17.50
Interbank Loans	$15.00	$15.75
Corporate Loans	$38.30	$42.13
Retail Loans	$20.00	$23.00
Fixed Assets	$5.00	$5.50
Total Assets	$100.00
Liabilities
Need to fund		$0.00
Interbank Depos	$10.00	$10.50
Retail Deposits	$60.00	$75.00
Senior	$5.00	$5.00
Sub debt	$10.00	$10.00
Equity	$15.00
Total Liabilities	$100.00

Bank Income Statement

Revenues	31-12-2011
Interest Income from Surplus funds	$0.20
Interest Income from Money with Central Bank (CRR of 6%)	$0.28
Interest Income from Government of India securities (SLR of 25%)	$1.46
Interest Income from Interbank Loans	$1.08
Interest Income from Corporate Loans	$5.63
Interest Income from Retail Loans	$3.23
Fee Based Income	$2.40
Total Revenues	$14.26
Cost
Interest Cost for Need to Fund	$0.00
Interest Cost for Interbank Depos	$0.72
Interest Cost for Retail Deposits	$3.38
Interest cost for Senior	$0.60
Interest Cost for Sub Debt	$1.60
Total Interest Cost	$5.99
Operating Expenses	$1.10
Depreciation	$0.50
PBT	$6.67
Corporate Tax	$1.67
Net Income	$5.00
Dividends	$0.50
Net Addition to Retained Earnings	$4.50

Question 2: ALM Interest Rate Management – 40 Marks (Interest Rate Risk Management)

ü After graduating from SP Jain, you join as an Investment Banker at reputed Bank whose client is IFCI

ü Your first assignment involves advising this client to better manage its assets & liabilities.

ü The following is an extract from IFCI’s 2010 Annual Report

ü For ease of calculation, the below data is simplified in the next slide.

Maturity pattern of Assets & Liabilities: (Rs Crore)

	1 day to 30/31 days (1 Mth)	Over 1 Mth to 3 Mth	Over 2 Mths to 3 Mths	Over 3 Mths to 6 Mths	Over 6 Mths to 1 Year	Over 1 Year to 3 Years	Over 3 Years to 5 Years	Over 5 Years	Total
Liabilities
Borrowings from Banks	0.25	2.15	21.39	359.02	580.18	2928.46	1195.47	2597.58	7684.50
Market Borrowings	22.29	50.27	10.98	224.17	240.58	675.86	1095.99	2905.45	5225.59
Total	22.54	52.42	32.37	583.19	820.76	3604.32	2291.46	5503.03	12910.09
Assets
Advances	108.58	239.78	181.77	818.14	1214.96	3311.06	1311.25	2925.82	10111.36
Investments	248.21	10.87	42.03	175.75	618.57	341.78	203.26	4238.10	5878.57
Total	356.71	250.65	223.80	993.89	1833.53	3652.84	1514.51	7163.92	15989.93

ü Ignore the coupons on these assets and liabilities, i.r, assume all assets and liabilities of various maturities to be zero coupon instruments

ü Assume IFCI’s equity is Rs. 3000 crores (16,000-13,000)

ü The current zero coupon yield curve (ZCYC) as published in the CIL website is provided next to the assets and liabilities for the corresponding maturities:

Maturity (Years)	1	2	4	7	Total
Liabilities (Rs Crores)	1500	3500	2500	5500	13000
Assets (Rs Crores)	4000	3500	1500	7000	16000
ZCYC	6.40%	6.90%	7.50%	8.00%

Analyze:

The RBI governor, D.Subbarao, makes an announcement that to control inflation, the RBI is hiking up interest rates by 1%. Assume that his monetary policy measure causes a parallel shift across tenors in the ZCYC by 1%. Given the profile of assets & liabilities of IFCI, is a hike in interest rates good for your client? (10 Marks)

IS there any risk due ot changes in interest rates for IFCI? (10 Marks)

What is the duration (% change in assets or liabilities per 1% change in interest rate) of assets & liabilities? (5+5=10 marks)

You suggest to your client that they consider using an Interest Rate SWAP (IRS) to manage the interest rate risk in their assets and liabilities? IFCI’s CFO agrees with you but doesn’t know how to determine the maturity amount for the IRS. Please recommend for what amount, tenor (i.e., maturity) should IFCI do the swap. Also specify, should IFCI go long (receive fixed) or go short (pay fixed) on the IRS t manage this interest rate risk? (10 Marks)

Question 3: ALM Credit Risk – 15 Marks

ü You learn from your client they are keen to explore securitization to mitigate credit risk, but are not sure how to do it.

ü For simplicity, assume that IFCI wants to securitize only 2 loans of equal notional (50% each).

ü The first loan has a credit spread of 3% while the second has a credit spread of 2%.

ü Assume risk-free interest rates to be zero for ease of calculation.

ü IFCI is able to find three investors to invest in this securitized product. The equity investor invests 10%, the Mezzanine investor 30% and the senior investor 60% of the total amount of securitization (100%)

ü Of the 2.5% credit spread (50%*3% + 50%*2%), how much return should each of the 3 investors receive? (5+5+5=15 Marks)

Calculate the equity, mezzanine and senior returns

A portfolio containing 2 loans

Loans Portfolio:

Spread (bps)	Notional	LGD
300	50%	60%
200	50%	50%

Maturity = 1 Year (Ignore discounting – Interest Rates Zero)

Assume the 2 loans behave independently of each other

Tranched structure: 60%-Senior, 30%-Mezzanine, 10%-Equity

Question 4: ALM Market Risk – 15 Marks

Risk Management – USD Cashflow

Your bank has done a forward contract where it is long USD and short INR for $500 million i.e., it is going to receive USD 500 million one year from now and pay (INR 48.40 * 500 million). Depending on the USD / INR Fx rate prevailing then, the payment in rupees would be:

USD / INR Fx Rate	40.00	41.00	42	43	44	45	46	47	48	49
Rs. (in crore)	2000	2050	2100	2150	2200	2250	2300	2350	2400	2450

ü The current USD/INR exchange rate is 46.00. The one year USD swap rate is 0.75%. The one year INR swap rate is 6.00%.

ü Your boss asks you to measure the market risk associated with this forward contract. He asks you to use the metric of Value-at-risk for qualification.

ü You remember the Monte-Carlo simulation you did in the ALM course and perform 100 simulations. Of these 100 simulations, 10 simulation which gave you the smallest values of USD/INR are provided to you in next slide.

ü Calculate absolute VaR and relative VaR (relative to the mean) at 95% and 99% confidence level? (5+5=10 Marks)

Hedging Solution

Your boss thinks that the US Dollar is going to fall in value in the next one year owing to the not-so-robust economic environment in the US apart from the ever-widening fiscal deficit of US Government. He thinks that there is a very high probability that USD/INR would be less than 46.25 a year from now.

You tell him that you know how to manage this, and that without taking any risk your bank can lock in an exchange rate of 48.40 i.e. your bank can realize INR 2420 (48.40*500 million) irrespective of what the exchange rate may be in 1 year.

Describe the 3 transactions that you would do to manage this risk and make sure that your bank realizes INR 2,420 crores? (5 Marks)

Question 5: ALM Capital Adequacy – 15 Marks

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

Compute the Tier 1 Capital ratio, the Tier 2 ratio, and the overall BIS capital ratio.

Additional Info:

ü 0% - Cash, government securities (OECD)

ü 20% - Interbank (OECD)

ü 50% - Mortgage

ü 100% - Loan