ECOM055 – Risk Management For Banking
Problem Set 10
Based on Book Chapter 19 银行业风险管理问题集作业代写
19.23.
Suppose a three-year corporate bond provides a coupon of 7% per year payable semiannually and has a yield of 5% (expressed with semiannual compounding). The yield for all maturities on risk-free bonds is 4% per annum (expressed with semiannual compounding). Assume that defaults can take place every six months (immediately before a coupon payment) and the recovery rate is 45%. Estimate the default probabilities assuming (a) that the unconditional default probabilities are the same on each possible default date and (b) that the default probabilities conditional on no earlier default are the same on each possible default date.
19.24.
A company has one- and two-year bonds outstanding, each providing a coupon of 8% per year payable annually. The yields on the bonds (expressed with continuous compounding) are 6.0% and 6.6%, respectively. Risk-free rates are 4.5% for all maturities. The recovery rate is 35%. Defaults can take place halfway through each year. Estimate the risk-neutral default rate each year.
Based on Book Chapter 24 银行业风险管理问题集作业代写
24.13.
Discuss whether hedge funds are good or bad for the liquidity of markets.
24.14.
Suppose that a trader has bought some illiquid shares. In particular, the trader has 100 shares of A, which is bid $50 and offer $60, and 200 shares of B, which is bid $25 and offer $35. What are the proportional bid–offer spreads? What is the impact of the high bid–offer spreads on the amount it would cost the trader to unwind the portfolio? If the bid–offer spreads are normally distributed with mean $10 and standard deviation $3, what is the 99% worst-case cost of unwinding in the future as a percentage of the value of the portfolio?
24.15.
A trader wishes to unwind a position of 200,000 units in an asset over eight days. The dollar bid–offer spread, as a function of daily trading volume q, is a + bcq where a = 0.2, b = 0.15, and c = 0.1, and q is measured in thousands. The standard deviation of the price change per day is $1.50. What is the optimal trading strategy for minimizing the 99% confidence level for the costs? What is the average time the trader waits before selling? How does this average time change as the confidence level changes?
Note: This exercise uses a spreadsheet and the SOLVER function in Excel. You don’t need to know and you are not going to be asked to use the SOLVER function in the final exam
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