Mid Term Exam 20-10-2017 Solutions

International Finance 20156
Academic Year 2019-2020

Professor Stefano Caselli Questions
1. Capital markets and private equity are two fundamentals business for
investment banks. Illustrate and compare briefly the role played by the
investment bank in both cases, giving a specific attention to the source
of profit (i.e., revenues and regulatory capital).
2. Illustrate for each capital market deal: i) what is the source of profit and
ii) the impact on regulatory capital.
3. Illustrate for private equity business: i) what is the source of profit and
ii) the impact on regulatory capital.
4. Considering structured finance business you have to illustrate: a) what

are the three conditions identifying a structured finance deal; b) in
which Basel II cluster a structured finance deal could be classified; c)
which roles can be played by the investment bank, giving a specific
attention to the source of profit (i.e., revenues and regulatory capital).
5. Illustrate the main characteristics of corporate lending activity and the

profit model as well the regulatory capital impact.
6. Considering corporate finance business you have: i) to give a definition

of the business itself; ii) to clarify what are the main deals included
inside the M&A activity.
7. Analysing Basle II framework to calculate regulatory capital for the

banking system you have to illustrate the usage of collaterals within
standard, IRB foundation and IRB advanced approaches.

banking system you have to illustrate in which clusters the capital
market activity could be classified.

banking system you have to illustrate the definition of PD and the
definition of LGD.
10. Analysing Basle II framework to calculate regulatory capital for

the banking system you have to give a definition of rating assignment
and rating quantification.
11. Considering the definition of PD, in which of the following four

cases the deal can be moved to default?
a. 100 million Euros 3 years zero coupon loan, whereas there’s a

delay of payment for 7 million Euros at the year 2 for more than
90 days
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b. 100 million Euros 10 years mortgage, whereas there’s a delay of
payments for 7 million Euros at the year 6 for more than 90 days
c. 100 million Euros open credit line, whereas the customer uses 110
million Euros for 60 days
d. 100 million Euros open credit line, whereas the customer uses 110
million Euros for 90 days
12. Considering the following customers:

a. AAA corporate;
b. BBB corporate;
c. A+ bank OECD country;
d. AA Central bank OECD country;
e. Unrated corporate.
For each of them you have to clarify and explain which is the weight in
Basel I and in Basel II standard approach.
13. Considering the following collaterals:

a. Claim on AAA US Treasury Bonds;
b. Claim on B+ corporate bonds;
c. Personal guarantee given by the CEO of a AAA company;
d. Personal guarantee given through an insurance contract by Allianz
(AAA rated)
e. Personal guarantee given through a CDS by XYZ Ltd (unrated
company);
f. Claim on real estate located in US (recovery rate = 0,888)
You have to clarify and explain which of them can be considered for
regulatory capital impact in a) standard approach, b) foundation
approach, c) advanced approach.
14. Analysing a loan given to A+ customer, data relevant for risk

management are: cost of capital 14%, risk free rate 2,5%, w (weight) to
calculate regulatory capital 69,61% and PD=0,50%. Using these data
you have to calculate:
a. the loan pricing using foundation approach;
b. the loan pricing using advanced approach, considering an
investment of 10 millions euro, MVC=12 millions euro, RR=0,40
and EAD=75%.
15. Analysing Basle II framework to calculate regulatory capital for

the banking system you have: a) to illustrate the pricing formula and its
usage; b) the concept of expected (or target) interest rate within the
formula; c) the impact of MVC on the formula and the characteristics of
collaterals.
16. You have to consider a customer rated BB. If a bank applies

standard approach you have to clarify: a) what’s the weight to be given
to the customer; b) what’s the impact of an insurance contract issued by
a AAA insurance company; c) what’s the impact of a CDS issued by a
unrated corporation; d) what’s the impact of a claim on a plant whereas
RR = 0,55.
17. Analysing a loan given to AA customer, data relevant for risk

management are: cost of capital 12%, risk free rate 2,25%, w (weight) to
calculate regulatory capital 68,61% and PD=0,30%. Using these data
you have to calculate:
a. To calculate the loan pricing using foundation approach;
b. to illustrate the usage of collaterals moving from IRB foundation to
IRB advanced approach.
18. What are the main differences between standard, foundation and
advanced approaches within Basle II framework?
19. ENI Group would like to raise from the banking system 100 million
euro to finance investment. BNP Paribas starts calculating the pricing
for the loan using a PD of 0,07%. BNP Paribas evaluates the following
collaterals:
MVC RR
Collateral 1 85 millions 0,80
If you know risk free rate is 2,05% and risk premium rate for ENI is
0,75%, you have to illustrate:
a. which of the three collaterals is better to use and for what reason;
b. what’s the pricing to apply to ENI, using the collateral you have
chosen following a foundation approach;
c. what’s the pricing to apply to ENI, using the collateral you have
chosen following an advanced approach;
d. what benefit can generate the usage of PD substitution through an
insurance contract sold by Lloyds whereas Lloyds’s PD is 0,03%;
e. what’s the meaning of applying a mark-down of 0,35% to the risk
premium rate.
20. Air France Group would like to raise from the banking system 500
million euro to finance investment. Santander starts calculating the
pricing for the loan using a PD of 0,11%. Santander evaluates the
following collaterals:
MVC RR
If you know risk free rate is 1,85%, risk premium rate for Air France is
0,95% and mark down is 0,20%, you have to illustrate:
a. which of the four collaterals is better to use and for what reason in an
advanced approach;
b. what’s the pricing to apply to Air France, using the collateral you
have chosen following an advanced approach;
c. what’s change in the formula if Santander uses a foundation
approach;
d. what benefit can generate the usage of PD substitution through an
insurance contract sold by Lloyds whereas Lloyds’s PD is 0,03%;
e. what’s the meaning of applying a mark-down of 0,20% to the risk
premium rate.
21. Considering the following balance sheet of a bank using

Basel II regulation standard approach, you have to:
a. calculate the margin coming from the P&L account, the total RWA,
the Regulatory Capital and the ROE both of the 8% minimum
regulatory capital and of the equity of a Bank showing the
following balance sheet whereas operational costs have got a
value of 25;
b. clarify on which assets it is possible to use collaterals having a benefit on weight
reduction.
ASSET Amount Yield Revenues Weight RWA
Cash 100 1,0%

AAA securities 150 2,0%
Corporates
A- loans 150 2,5%

Unrated loans 450 5,0%
Defaulted assets 150 2,0%
Publ
ic
BBB+ securities 300 5,0%
Admin Unrated loans 400 5,5%
Loans to supranational 100 2,5%
TOTAL ASSET
LIABILITIES Amount Yield Costs
Deposits 1100 1,00%

Bonds 500 3,50%
Capital 200
TOTAL LIABILITIES
22. Considering a bank using Basel II regulation, you have to:

a. explain to which of the seven clusters all the deals included into
the capital market business belong;
b. calculate the margin coming from the P&L account, the total RWA,
the Regulatory Capital and the ROE both of the minimum
regulatory capital and of the equity of a Bank showing the
following balance sheet whereas operational costs have got a
1,58% ratio and standard approach is the requirement.
ASSET Amount Yield Revenues Weight RWA
Cash 300 0,5%

AAA securities 200 1,5%
Corporates
A – loans 250 2,5%

CCC loans 300 6,5%
Admin
Public
BBB+ securities 200 4,5%

Unrated loans 250 7,5%
Consumer credit 0 8,5%
Retail
TOTAL ASSET 1900
LIABILITIES Amount Yield Costs
Deposits 1100 0,50%

Bonds 650 3,00%
Capital 150
TOTAL LIABILITIES 1900
23. Let’s consider the capital market business within the CIB
offer. You have to:
a. give the definition of primary capital market and of secondary
capital market;
b. fill the following table whereas: i) for the “Profit Model” you have
to write ALWAYS, ONLY IF (adding when) and NEVER; ii) for the
“Regulatory Capital Impact” you have to write ALWAYS, ONLY IF
(adding when) and NEVER; iii) for the Basel II classification you
have to write which cluster can be involved (please, write simply
the acronym C, SME, R, FI, G, SL, E or NONE if there’s not a
regulatory capital impact).
Business Profit Model Regulator Basel II

Fee Capital Interest y Capital clusters
Gain Margin Impact involved
IPO
Brokerage
Dealing
Prop
Trading
24. If you consider “capital market” business for an Investment Bank,

you have to fill the following table knowing that: a) the deal value is
always 100; b) the regulatory capital is always 8%; c) dealing is 100%
successful.
Deals Percentages Amounts Profit

Capita Fees Interest Cost Capital Fees Interest Cost of
l gain margin of gain margin equity
equity
Placement 8% 5% 3% 14% 5 5
Underwriting 8% 5% 3% 14% 8 5 0.14*8=1.12 11.88
Brokerage 8% 5% 3% 14% 5 5
Dealing 8% 5% 3% 14% 8 5 13
Prop trading 8% 5% 3% 14% 8 0.14*8=1.12 6.88

Market 8% 5% 3% 14%
making 5 5
Specialist 8% 5% 3% 14% 8 5 0.14*801.12 11.88
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International Finance 20156

Academic Year 2019-2020

4. Considering structured finance business you have to illustrate: a) what

5. Illustrate the main characteristics of corporate lending activity and the

6. Considering corporate finance business you have: i) to give a definition

7. Analysing Basle II framework to calculate regulatory capital for the

8. Analysing Basle II framework to calculate regulatory capital for the

9. Analysing Basle II framework to calculate regulatory capital for the

10. Analysing Basle II framework to calculate regulatory capital for

11. Considering the definition of PD, in which of the following four

a. 100 million Euros 3 years zero coupon loan, whereas there’s a

12. Considering the following customers:

13. Considering the following collaterals:

14. Analysing a loan given to A+ customer, data relevant for risk

15. Analysing Basle II framework to calculate regulatory capital for

16. You have to consider a customer rated BB. If a bank applies

17. Analysing a loan given to AA customer, data relevant for risk

21. Considering the following balance sheet of a bank using

ASSET Amount Yield Revenues Weight RWA

Cash 100 1,0%

A- loans 150 2,5%

BBB+ securities 300 5,0%

LIABILITIES Amount Yield Costs

Deposits 1100 1,00%

22. Considering a bank using Basel II regulation, you have to:

ASSET Amount Yield Revenues Weight RWA

Cash 300 0,5%

A – loans 250 2,5%

BBB+ securities 200 4,5%

Defaulted assets 0 4,5%

TOTAL ASSET 1900

LIABILITIES Amount Yield Costs

Deposits 1100 0,50%

TOTAL LIABILITIES 1900

Business Profit Model Regulator Basel II

24. If you consider “capital market” business for an Investment Bank,

Deals Percentages Amounts Profit

Prop trading 8% 5% 3% 14% 8 0.14*8=1.12 6.88

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