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. Consider two banks, call them A and B. At the present time, their aggregate...

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Finance

. Consider two banks, call them A and B. At the present time, their aggregate asset positions in terms of market values are: (5 marks)

B 5

Loans (in $billions) 70 95

As of now, the market value of equity of each of the two banks is $6 billion. Deposits are the only liabilities of each bank and other assets, besides liquid assets and loans, are assumed to be zero. Suppose each bank finds defaults on its loans of 6.5% today. With this situation of loan default, what happens to solvency of each bank?

Explain why one of the two banks becomes insolvent while other remains solvent.

B. Calculatetheexpectedborrowingrateoverthenext91daysofissuinga91-daycommercial paper with domination of 500,000 and current price of 490,000. The issuer is a Canadian finance company. The current spot exchange rate between C$ and is: C$1.63 = 1.0 and the spot exchange rate expected on the 91st day is: C$1.6 = 1.0. Explain why the borrowing rate of raising funds through the 91-day commercial paper is so low. (4 marks)

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