Chap013_Saunders7e_SLIDES

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

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Unformatted text preview: Ch-13Off-Bal.Sheet Risk OverviewThis 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.13-1Off-Balance-Sheet RisksContingent assets Contingent liabilitiesDerivative securities Held off the balance sheet:Forward contractsFutures contractsOption contractsSwap contracts13-2OBS ActivitiesSome big losses on derivatives:Bankers TrustBaringsNatWest BankMidland BankChase ManhattanUnion Bank of SwitzerlandLong-Term CapitalJ.P. Morgan Chase & CitigroupAllFirst Bank/Allied Irish BankAmaranth Advisors13-3OBS Activities and SolvencyOff-balance-sheet assetsOff-balance-sheet liabilitiesValuation of OBS items:Delta of an optionNotional value of an OBS itemDelta equivalent or Contingent asset value= Delta Notional or face value of option13-4ValuationTrue 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 LiabilitiesExposure to OBS risk just as important as other risk exposures13-5Derivative Contracts Held by Commercial Banks (Billions)19922009Futures & ForwardsSwapsOptionsCredit DerivativesTotal$4,7802,4171,5688,765$23,579133,86229,91614,607201,96413-6Incentives to Increase OBS Activities...
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Chap013_Saunders7e_SLIDES - Ch-13Off-Bal.Sheet Risk...

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