Chap013_Saunders7e_SLIDES

Chap013_Saunders7e_SLIDES - Ch-13 Off-Bal.Sheet Risk...

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Ch-13 Off-Bal.Sheet Risk Overview This chapter discusses the risks associated with off- balance-sheet activities. OBS activities are often designed to reduce risks through hedging with derivative securities and other means. However, OBS risk can be substantial. OBS mortgage- backed securities were instrumental in the financial crisis. 13- 1
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Off-Balance-Sheet Risks Contingent assets Contingent liabilities Derivative securities Held off the balance sheet: Forward contracts Futures contracts Option contracts Swap contracts 13- 2
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OBS Activities Some big losses on derivatives: Bankers Trust Barings NatWest Bank Midland Bank Chase Manhattan Union Bank of Switzerland Long-Term Capital J.P. Morgan Chase & Citigroup AllFirst Bank/Allied Irish Bank Amaranth Advisors Calyon Securities 13- 3
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OBS Activities and Solvency Off-balance-sheet assets Off-balance-sheet liabilities Valuation of OBS items: Delta of an option Notional value of an OBS item Delta equivalent or Contingent asset value = Delta × Notional or face value of option 13- 4
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Valuation True picture of net worth Should include market value of on- and off-balance- sheet activities E = (A – L) + ( CA – CL ) Equity = Assets – Liabilities + Contingent Assets –Contingent Liabilities Exposure to OBS risk just as important as other risk exposures 13- 5
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Derivative Contracts Held by Commercial Banks ( Billions ) 1992 2009 Futures & Forwards Swaps Options Credit Derivatives Total $4,780 2,417 1,568 8,765 $23,579 133,862 29,916 14,607 201,964 13- 6
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