ECON 330-You are to prepare a presentation for an upcoming strategic

1. You are to prepare a presentation for an upcoming strategic planning meeting at the bank. You have been asked to determine which of two products the bank should invest $5B, Product X or Product Y. The bank will hold either product on its balance sheet as whole loans that carry a 50% risk weight and the binding regulatory constraint is 8% leverage ratio. Net income for Product X is .5% and 1.5% for Product Y. Losses on Product X and Y are expected to be 1.5% and 3%, respectively. Your risk team determines that the 99th percent worst loss for Product X and Y are 4.5% and 14%, respectively. The target hurdle rate for the company is 15%. Which investment do you recommend to the Executive Committee and why – full credit requires all work to be shown.
2. How would you characterize the previous question in terms of SVA?
3. Suppose ExBank’s risk analysts have estimated that the expected default rate on a commercial loan portfolio is 10%. The portfolio currently contains $500 million in commercial loan assets. Estimated recovery rates on the portfolio are 65%. The volatility associated with commercial defaults is 6%. Assume the adverse volatility factor is 1.96 and a 10 day VaR. Using what you know already for how to calculate VaR, what is the economic capital of the commercial loan portfolio?
4. Assume you have the following information on bank economic capital and correlations.

What is the total economic capital for the bank? Please show all work.

1. If during a financial crisis losses across risk types in both businesses were to rise in a 1-to-1 basis how would that affect the risk of the bank?.