QUESTION 3. a) Discuss the potential channels through which the relationship between banks and governments...
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Finance
QUESTION 3.
a) Discuss the potential channels through which the relationship between banks and governments can create systemic risk.
[10 marks]
b) Suppose that a one-year project that requires an initial investment of $5 million has a 65% chance of generating $12 million income, a 5% chance of generating $7 million income, a 10% chance of generating $3 million income and a 20% chance of generating nothing.
i) Illustrate the cumulative probability distribution for this projects gains and losses [Feel free to draw the distribution by hand and paste a picture of it].
[4 marks]
ii) What is the projects 90% one-year VaR? What is the meaning of it?
[4 marks]
iii) What is the expected shortfall when the confidence level is 75%?
[4 marks]
iv) In what way the VaR is inferior to the Expected Shortfall as a risk measure?
[3 marks]
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