Bank Management Final Review
New Material
Chapter 16
Principal types of loans made by banks
Real estate, commercial and industrial, loan to financial institutions,
credit card and other to individuals, lease financing, and ag.
Short, med, and long matur

Chapter 09_Risk Management: Asset-Backed Securities, Loan
Sales, Credit Standbys, and Credit Derivatives
Student: _
1.
When a bank sets aside a group of income-earning assets and then sells securities based upon those
assets, it is _ those assets.
_
2.
Of

Chapter 08_Risk Management: Financial Futures, Options,
Swaps, and Other Hedging Tools
Student: _
1.
A(n) _ is an agreement between a buyer and a seller today which calls for
the delivery of a particular security in exchange for cash at some future date f

Chapter 11_Liquidity and Reserves Management: Strategies and
Policies
Student: _
1.
A(n) _ is an asset which can be converted into cash easily, which has a relatively
stable price, and is reversible so that the sellers can recover their original investmen

Black scholes equation
lognormal represents only positive values
BSM assumes stock prices are lognormally distributed over short term, defined by
mu and sigma
Ito process
d1 = (ln(50/55) +(0.06+(0.2)^2/2)*1)/(0.2*sqrt(1)
=(ln(50/55)+(0.08)/0.2
= -0.076
d2

Exam 2 Review
Call vs put option
Call option- right to buy the underlying asset (usually equity) at a specific strike
price on a expiration date
Long call means you buy the right, so short call has the obligation to sell
Buyer pays a premium for the right

Stock
U* = exp(sqrt(stddev^2*h+(mean*h)^2)
h = (T-t)/(m-1) = (1-0)/(3-1)= 0.5
N = (0.06,0.07)-given as (mean, std dev)
U*=exp(sqrt(0.07^2*0.05+(0.06*0.5)^2)
U*=1.06
D*=(1/1.06) = 0.943
Call option
Used for valuing option at a time when both upside and dow

Swaps are instruments whereby two parties exchange benefits
Most common swap is fixed for floating
Differential between basis in swaps is called the spread
Practical application
absolute vs comparative advantage
absolute adv for fixed: A (lowest b/w A and

Compounding quant
P = principal
R = rate
T= time period
E = exp(1) in excel
M = number of compounding periods per year
Discrete P(1+r/m)^mt
Continuous Pe^(rt)
Discrete compounding into infinity becomes continuous compounding
Dimensions of risk 08/29/2016

Continuous rate
Ln (Pe^*bt)/Pe^*at)= c
Across periods of time, t=2 and t=1
(1+b)^2/(1+a)^1)-1
Arbitrage opportunity
$50 asset with 10-yr treasury yielding 2%, 9 months
F = Se^rT
50*e^(0.02*9/12) = 50.756
With a $52 forward contract on a $50 asset
Rf = 2%

Derivative features
Time finite life
Underlying - asset
Primary assets: interest rate, exchange rate, commodity, equity, fix
income
Secondary asset: risk free rate
Can be positively or negatively correlated
Not only +1 or -1
Party counterparty
Buyer: long

Covariance = correlation(1,2)*(std dev1)*(std dev2)
Variance = std dev squared
R^2 = measured from 0 to 1 and closer to 1 is a good fit
R^2 adjusted = takes out excess variables if more than 1 variable
RMSE = error from r^2, shows confidence in how accura

Put-call parity
C + PV(X) = S+ P
Value of call option + value of a bond (with face value) = value of underlying stock +
value of put option
Exercise early if
Dividend > TVM + insurance
lightning strikes your house if it doesnt make sense to wait until exp

Risk as frequency
Frequency = probability of loss
Ex. Buy 1 lottery ticket because the opportunity cost of buying more
tickets is quantifiably less
Not concerned with what the outcome is, just the probability of it
Risk as magnitude
Need a dimension of ri

Chapter 07_Risk Management for Changing Interest Rates:
Asset-Liability Management and Duration Techniques
Student: _
1.
The _ view of assets and liabilities held that the amount and types of deposits
was primarily determined by customers and hence the ke