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April 2012 Q6

A

Ali10

Member
Hi

I have a few queries on the solution to the above question:

- in part (i) how come were the appropriate weightings decided on eg why were the residential mortgages given a weighting of 50 not 100 like the loans?

- in part (ii) how do we come to the conclusion that a fall of 17% in the MV of assets would erode the equity?

- where is the income statement used in the solution?

Thanks

:)
 
Q7?

(i) The weightings are an attempt to recognise the riskiness of the assets (as they as under the Basel rules). The mortgages are secured and hence less risky than unsecured loans (100%), but they are more risky than risk-free (*cough*) government debt which gets a weighting of 0%

(ii) If we take just the debt investments, loans and derivative (at market value), we have over 9,000 of assets. If the value falls by 17% we suffer a loss of over 1,500 which would more than wipe out the 1,480 of shareholders equity.

(iii) The I/S is barely used, but does get a mention in (vii) when the rate of increase of personnel expenses is mentioned.
 
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