(Solution) Financial Management- Assignment
Added on 2021-06-14
7 Pages1216 Words23 Views
|
|
|
FINANCIAL MANAGEMENT1
Table of ContentsAnswer 1)...............................................................................................................................1Answer 2)...............................................................................................................................1Answer 3)...............................................................................................................................2Answer 4)...............................................................................................................................2References..................................................................................................................................3Appendix’...................................................................................................................................4Appendix 1.............................................................................................................................4Appendix 2.............................................................................................................................4Appendix 3.............................................................................................................................42
Answer 1) The calculation of marked to market value reveals that the bank holds total value of $597436.03. The maturity period of US government bond is 2 years; on the other hand,German government bonds have maturity values of 5 years. The yield to maturity for annualfor US government bond was 2.278%; however, for German government bonds, it wasnegative as indicated in the calculation. The calculation is based on certain assumptions 1)annual coupon rate of US government bond is 2.5% whereas, for German government bond isnil. However, the annual rate is considered rather than semi-annual rate. Since the couponrate is equal to YTM, these bonds are par value bond. Simultaneously, Exchange Rate, i.e.EUR: USD is 1.2395, and it was necessary to calculate because the bank is based in the US.The current price of US government bond, German, German government bonds, and cash is$99,920.79, € 3, 01,383.82 and 100000.00 respectively. Thus, total marked to Market Valuein USD, $ 597436.03. Answer 2)The bank portfolio includes various risks including exchange rates, interest rates, as well asdefault rate (Chu, Mathieu and Mbagwu, 2018). In case of present US bank, fluctuations inU.S. interest rate, Germany interest rate as well as exchange rate changes in USD: EUR aremain risk factors affecting the portfolio. However, certain default risks are applicable on theUS bank portfolio. It has been revealed that Local Bank has a strong bias toward riskmitigation. On the basis of correlation analysis, it can be stated that 5 Yrs Germangovernment bonds interest rates and exchange rates of USD and ERU are weakly correlated.However, there is a significant negatively correlated relationship between exchange rates. Based on the correlation analysis, it can be interpreted that the U.S. based bank’s capital canbe allocated in relation to the movement in USD: EUR exchange-rate. It has been assessedthat USD appreciates in against EUR in the near future; therefore, German interest rate andthe U.S. interest rate will be declined in future that will lead to increase in the prices ofGerman Bond. The company will enjoy benefits of selling a portion of the German bond toearn good interest rates. 1
End of preview
Want to access all the pages? Upload your documents or become a member.
Related Documents