Finance Homework
Hi I am having trouble with this homework problem. I do not understand why he is giving me the Required Reserves. Do I need this to figure out the cost of borrowing? Also 2e and 2f I do not understand either. Thanks for the help!
you own a multinational bank that specializes in high risk loans Your asset sheet contains $100 Billion of high risk loans, with an average rate of, let’s say, 7%. Let’s assume that you bank has $30 Billion of cash. Let’s say your liabilities are $120 Billion of consumer deposits. The rate for these deposits has an expected value of 3%. Let’s assume that required reserves are 15% of deposits. Lastly, instead of dealing with the monstrous tax system we have in place let’s just say that we have a flat 10% tax rate on profits. Based on this information, calculate how much you would expect your ROE and ROA to be? 2a. First calculate your expected revenue. 2b. Calculate your costs of borrowing. 2c. Next, find your expected profit. Don’t forget to calculate taxes and required reserves! 2d. Subsequently, you can also find your ROE and ROA.
Let’s say you want returns that will reduce your interest rate risk. A suitable counterparty is willing to put up $ 40 Billion worth of fixed rate payments for $40 Billion of your floating rate payments. 2e. Let’s say that the risk free rate is 3%. Work out an interest rate swap that will benefit both parties. Figure out the expected returns on these investments. 2f. Adjust your balance sheet to reflect the changes
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