Q: Explain carefully the distinction between real-world and risk-neutral
Explain carefully the distinction between real-world and risk-neutral default probabilities. Which is higher? A bank enters into a credit derivative where it agrees to pay $100 at the end of one year...
See AnswerQ: What is meant by a bubble? Consider whether the increase in
What is meant by a bubble? Consider whether the increase in the price of bitcoin in 2017 is a bubble.
See AnswerQ: Look at the data in Table 28.1. Is Lending
Look at the data in Table 28.1. Is Lending Club good at assessing risk? Is there a reasonable trade-off between risk and return for lenders? What risks are lenders taking?
See AnswerQ: With the benefit of hindsight, we can say that Kodak was
With the benefit of hindsight, we can say that Kodak was in the “imaging and moment-sharing business.” What business are banks in?
See AnswerQ: Suppose that each of two investments has a 4% chance of
Suppose that each of two investments has a 4% chance of a loss of $10 million, a 2% chance of a loss of $1 million, and a 94% chance of a profit of $1 million. They are independent of each other. (a)...
See AnswerQ: Suppose that a one-day 97.5% VaR is
Suppose that a one-day 97.5% VaR is estimated as $13 million from 2,000 observations. The one-day changes are approximately normal with mean zero and standard deviation $6 million. Estimate a 99% conf...
See AnswerQ: Suppose that one investment has a mean return of 8% and
Suppose that one investment has a mean return of 8% and a standard deviation of return of 14%. Another investment has a mean return of 12% and a standard deviation of return of 20%. The correlation be...
See AnswerQ: Consider a one-year European call option on a stock when
Consider a one-year European call option on a stock when the stock price is $30, the strike price is $30, the risk-free rate is 5%, and the volatility is 25% per annum. Use the RMFI software to calcul...
See AnswerQ: Explain the moral hazard problems with deposit insurance. How can they
Explain the moral hazard problems with deposit insurance. How can they be overcome?
See AnswerQ: A bank estimates that its profit next year is normally distributed with
A bank estimates that its profit next year is normally distributed with a mean of 0.8% of assets and the standard deviation of 2% of assets. How much equity (as a percentage of assets) does the compan...
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