Financial Institutions Management 4th Edition SAUNDERS Solutions Manual

1. PART 1 Introduction
2. CHAPTER 1 Why are financial institutions special?
3. Introduction
4. Financial institutions’ specialness
5. FI function as broker
6. FI function as asset transformer
7. Information costs
8. Liquidity and price risk
9. Other special services
10. Other aspects of specialness
11. The transmission of monetary policy
12. Credit allocation
13. Intergenerational wealth transfers or time intermediation
14. Payment services
15. Denomination intermediation
16. Specialness and regulation
17. Safety and soundness regulation
18. Monetary policy regulation
19. Credit allocation regulation
20. Consumer and investor protection regulation
21. Entry regulation
22. The changing dynamics of specialness
23. Trends in Australia
24. Global trends
25. The rise of financial services holding companies
26. The shift away from risk measurement and management and the global financial crisis
27. Summary
28. Key terms
29. Questions and problems
30. Web questions
31. Pertinent websites
32. Appendix 1A (online): The US sub-prime crisis, the global financial crisis and the failure of financial services institutions’ specialness
33. Appendix 1B: Implementation of monetary policy by the Reserve Bank of Australia
34. CHAPTER 2 The financial services industry: depository institutions
35. Introduction
36. Banks
37. Size, structure and composition of the industry
38. Balance sheet and trends
39. Bank performance
40. Credit unions and building societies
41. Size, structure and composition of the industry
42. Balance sheet, performance and trends
43. The regulation of Australian depository institutions
44. The key legislation
45. The regulatory agencies
46. Australian Prudential Supervision Framework
47. Overview of the regulation of depository institutions
48. Summary
49. Key terms
50. Questions and problems
51. Web questions
52. Pertinent websites
53. Appendix 2A (online): Financial statement analysis using a return on equity framework
54. CHAPTER 3 The financial services industry: other financial institutions
55. Introduction
56. Insurers and fund managers
57. Life insurance
58. General insurance
59. Superannuation funds
60. Managed funds and unit trusts
61. Other financial institutions
62. Money market corporations
63. Finance companies
64. Securitisation vehicles
65. Summary
66. Key terms
67. Questions and problems
68. Web questions
69. Pertinent websites
70. CHAPTER 4 Risks of financial institutions
71. Introduction
72. Interest rate risk
73. Market risk
74. Credit risk
75. Country or sovereign risk
76. Foreign exchange risk
77. Liquidity risk
78. Off-balance-sheet risk
79. Technology and operational risks
80. Technology risk
81. Operational risk
82. Insolvency risk
83. Other risks and the interaction of risks
84. Summary
85. Key terms
86. Questions and problems
87. Web question
88. Pertinent websites
89. PART 2 Measuring and managing risk
90. CHAPTER 5 Interest rate risk measurement: the repricing model
91. Introduction
92. The level and movement of interest rates
93. The repricing model
94. Rate-sensitive assets
95. Rate-sensitive liabilities
96. Changes to NII—equal changes in rates on RSAs and RSLs
97. Changes to NII—unequal changes in rates on RSAs and RSLs
98. Weaknesses of the repricing model
99. Market value effects
100. Over-aggregation
101. The problem of runoffs
102. Cash flows from off-balance-sheet activities
103. Summary
104. Key terms
105. Questions and problems
106. Web questions
107. Integrated mini case
108. Pertinent websites
109. Appendix 5A (online): Maturity model
110. Appendix 5B: Term structure of interest rates
111. CHAPTER 6 Interest rate risk measurement: the duration model
112. Introduction
113. Duration: a simple introduction
114. A general formula for duration
115. The duration of interest-bearing bonds
116. The duration of a zero-coupon bond
117. The duration of a consol bond (perpetuity)
118. Features of duration
119. Duration and maturity
120. Duration and yield
121. Duration and coupon interest
122. The economic meaning of duration
123. Semi-annual coupon bonds
124. Using duration to measure an FI’s interest rate risk
125. Duration and immunising future payments
126. Duration and interest rate risk in the whole balance sheet of an FI
127. Immunisation and regulatory considerations
128. Difficulties of applying the duration model
129. Duration matching can be costly
130. Immunisation is a dynamic problem
131. Large interest rate changes and convexity
132. Summary
133. Key terms
134. Questions and problems
135. Integrated mini case
136. Pertinent websites
137. Appendix 6A (online): The basics of bond valuation
138. Appendix 6B: Incorporating convexity into the duration model
139. CHAPTER 7 Managing interest rate risk using off-balance-sheet instruments
140. Introduction
141. Forward and futures contracts
142. Spot contracts
143. Forward contracts
144. Futures contracts
145. Forward contracts and hedging interest rate risk
146. Hedging interest rate risk with futures contracts
147. Microhedging
148. Macrohedging
149. Routine hedging versus selective hedging
150. Macrohedging with futures
151. The problem of basis risk
152. Options contracts
153. Basic features of options
154. Buying a call option on a bond
155. Writing a call option on a bond
156. Buying a put option on a bond
157. Writing a put option on a bond
158. Writing versus buying options
159. Economic reasons for not writing options
160. Regulatory reasons for not writing options
161. Futures versus options hedging
162. The mechanics of hedging a bond or bond portfolio using options
163. Hedging with bond options using the binomial model
164. Actual bond options
165. Using options to hedge the interest rate risk of the balance sheet
166. Basis risk
167. Interest rate swaps
168. Swap markets
169. The generic interest rate swap
170. Realised cash flows on an interest rate swap
171. Macrohedging with swaps
172. Interest rate swaps and credit risk concerns
173. Summary
174. Key terms
175. Questions and problems
176. Web questions
177. Integrated mini case
178. Pertinent websites
179. Appendix 7A (online): Microhedging with futures
180. Appendix 7B (online): Black–Scholes option pricing model
181. Appendix 7C (online): Microhedging with options
182. Appendix 7D (online): Setting rates on an interest rate swap
183. CHAPTER 8 Managing interest rate risk using loan sales and securitisation
184. Introduction
185. Loan sales
186. Types of loan sales contracts
187. Using a loan sale to manage interest rate risk
188. Why FIs sell loans
189. Factors encouraging loan sales growth in the future
190. Securitisation
191. Converting on-balance-sheet assets to a securitised asset
192. The pass-through security
193. Prepayment risk on pass-through securities
194. Prepayment models
195. The collateralised mortgage obligation (CMO)
196. The mortgage-backed bond (MBB)
197. Can all assets be securitised?
198. Summary
199. Key terms
200. Questions and problems
201. Web questions
202. Pertinent websites
203. Appendix 8A (online): Option-related prepayment models
204. Appendix 8B (online): Mortgage pass-through strips
205. CHAPTER 9 Market risk
206. Introduction
207. Calculating market risk exposure
208. The RiskMetrics model
209. The market risk of fixed-income securities
210. Foreign exchange
211. Equities
212. Portfolio aggregation
213. The historic (back simulation) approach
214. The historic (back simulation) model versus RiskMetrics
215. The Monte Carlo simulation approach
216. Expected shortfall
217. Regulatory models: the BIS standardised framework
218. Partial risk factor approach
219. Fuller risk factor approach
220. The BIS regulations and large bank internal models
221. Summary
222. Key terms
223. Questions and problems
224. Web question
225. Integrated mini case
226. Pertinent websites
227. CHAPTER 10 Credit risk I: individual loan risk
228. Introduction
229. Credit quality problems
230. Types of loans
231. Business loans
232. Housing loans
233. Consumer or individual loans
234. Other loans
235. Loan defaults
236. Calculating the return on a loan
237. The contractually promised return on a loan
238. The expected return on a loan
239. Retail versus wholesale credit decisions
240. Retail
241. Wholesale
242. Measurement of credit risk
243. Default risk models
244. Qualitative models
245. Quantitative models
246. Newer models of credit risk measurement and pricing
247. Term structure derivation of credit risk
248. Mortality-rate derivation of credit risk
249. RAROC models
250. Using duration to estimate loan risk
251. Using loan default rates to estimate loan risk
252. Option models of default risk
253. Summary
254. Key terms
255. Questions and problems
256. Web questions
257. Integrated mini case
258. Pertinent websites
259. Appendix 10A (online): Credit analysis
260. CHAPTER 11 Credit risk II: loan portfolio and concentration risk
261. Introduction
262. Simple models of loan concentration risk
263. Loan portfolio diversification and modern portfolio theory (MPT)
264. Moody’s Analytics portfolio manager model
265. Partial applications of portfolio theory
266. Regulatory models
267. Use of derivatives to hedge credit risk
268. Credit forward contracts and credit risk hedging
269. Hedging credit risk with options
270. Credit swaps
271. Swaps and credit risk concerns
272. Use of loan sales and securitisation to manage credit risk
273. Removal of credit risk
274. Reduction of concentration risk
275. Maintenance of customer relationships
276. Capital adequacy regulations
277. Moral hazard issues
278. Summary
279. Key terms
280. Questions and problems
281. Web questions
282. Integrated mini case
283. Pertinent websites
284. Appendix 11A (online): CreditMetrics
285. Appendix 11B (online): Credit risk+
286. CHAPTER 12 Sovereign risk
287. Introduction
288. Credit risk versus sovereign risk
289. Debt repudiation versus debt rescheduling
290. Country risk evaluation
291. Outside evaluation models
292. Internal evaluation models
293. Using market data to measure risk: the secondary market for LDC and emerging market debt
294. The structure of the market
295. The early market for sovereign debt
296. Today’s market for sovereign debt
297. Summary
298. Key terms
299. Questions and problems
300. Web questions
301. Pertinent websites
302. Appendix 12A (online): Mechanisms for dealing with sovereign riskexposure
303. CHAPTER 13 Foreign exchange risk
304. Introduction
305. Foreign exchange rates and transactions
306. Foreign exchange rates
307. Foreign exchange transactions
308. Sources of foreign exchange risk exposure
309. Foreign exchange rate volatility and FX exposure
310. Foreign currency trading
311. FX trading activities
312. Interaction of interest rates, inflation and exchange rates
313. Purchasing power parity
314. Interest rate parity
315. Foreign asset and liability positions
316. The return and risk of foreign investments
317. Risk and hedging
318. On-balance-sheet hedging
319. Managing FX risk using derivative instruments
320. Hedging with forwards
321. Hedging with futures
322. Estimating the hedge ratio
323. Using options to hedge FX risk
324. Using currency swaps to hedge FX risk
325. Multicurrency foreign asset–liability positions
326. Summary
327. Key terms
328. Questions and problems
329. Web question
330. Pertinent websites
331. CHAPTER 14 Liquidity risk
332. Introduction
333. Causes of liquidity risk
334. Liquidity risk at depository institutions
335. Liability-side liquidity risk
336. Asset-side liquidity risk
337. Measuring a depository institution’s liquidity exposure
338. Liquidity planning
339. Liquidity risk, unexpected deposit drains and bank runs
340. Bank runs, the discount window and deposit guarantees
341. Liquidity and financial system stability
342. Liquidity risk in other financial institutions
343. Life insurance companies
344. General insurers
345. Managed funds
346. Summary
347. Key terms
348. Questions and problems
349. Web question
350. Pertinent websites
351. CHAPTER 15 Liability and liquidity management
352. Introduction
353. Liquid asset management
354. Monetary policy implementation reasons
355. Taxation reasons
356. The composition of the liquid asset portfolio
357. Return–risk trade-off for liquid assets
358. The liquid asset reserve management problem for depository institutions
359. Management of exchange settlement funds
360. Liquidity management as a knife-edge management problem
361. Liability management
362. Funding risk and cost
363. Choice of liability structure
364. Deposit liabilities
365. Cheque account and other demand deposits
366. Savings accounts
367. Cash management/investment savings accounts
368. Fixed-term deposits
369. Negotiable certificates of deposit (NCDs)
370. Non-deposit liabilities
371. Interbank funds
372. Repurchase agreements (Repos)
373. Covered bonds
374. Other borrowings
375. Liquidity regulation
376. Minimum quantitative requirements
377. LCR regime ADIs
378. MLH regime ADIs
379. Net stable funding ratio (NSFR)
380. Improved global liquidity?
381. Depositor protection and deposit guarantees
382. Australian depositor protection mechanisms
383. Summary
384. Key terms
385. Questions and problems
386. Web questions
387. Pertinent websites
388. CHAPTER 16 Off-balance-sheet risk
389. Introduction
390. OBS activities and FI solvency
391. Returns and risks of OBS activities
392. Loan commitments
393. Documentary letters of credit and standby letters of credit
394. Derivative contracts: futures, forwards, swaps and options
395. Forward purchases and sales of when-issued securities
396. Loans sold
397. The role of OBS activities in reducing risk
398. Summary
399. Key terms
400. Questions and problems
401. Web question
402. Integrated mini case
403. Pertinent websites
404. CHAPTER 17 Technology and other operational risks
405. Introduction
406. What are the sources of operational risk?
407. Technological innovation and profitability
408. The impact of technology on wholesale and retail financial service production
409. Wholesale financial services
410. Retail financial services
411. Advanced technology requirements
412. The effect of technology on revenues and costs
413. Technology and revenues
414. Technology and costs
415. Testing for economies of scale and economies of scope
416. The production approach
417. The intermediation approach
418. Empirical findings on cost economies of scale and scope and implications for technology expenditures
419. Economies of scale and scope and X-inefficiencies
420. Technology and the payments system
421. Trends in retail payments
422. Trends in high-value payments
423. Risks that arise in an electronic payment system
424. Other operational risks
425. Regulatory issues and technology and operational risks
426. Operational risk and FI insolvency
427. Consumer protection
428. Summary
429. Key terms
430. Questions and problems
431. Web questions
432. Pertinent websites
433. Appendix 17A (online): Selection of research articles on the efficiency of Australian financial institutions
434. CHAPTER 18 Capital management and adequacy
435. Introduction
436. Capital and insolvency risk
437. Capital
438. The market value of capital
439. The book value of capital
440. The discrepancy between the market and book values of equity
441. Arguments against market value accounting
442. Capital management
443. Regulation of capital of Australian DIs
444. Basel accords: The evolution of DI capital regulation
445. Pillar 1: Capital adequacy
446. Measurement of regulatory capital
447. Measuring risk-adjusted assets
448. Calculating the capital adequacy ratios
449. Leverage ratio
450. Capital buffers
451. Pillar 2: DI risk assessment and supervision
452. Pillar 3: Capital and risk disclosure
453. Summary
454. Key terms
455. Questions and problems
456. Web questions
457. Pertinent websites
458. Appendix 18A: Market risk capital charge for interest rate risk using the standardised approach
459. Appendix 18B: Criticisms of the risk-based capital ratio
460. Appendix 18C (online): Capital regulation of life insurers and general insurers
461. Glossary
462. Index

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