c. If Big Bank would have invested $20 directly into MBS (the same type of loans as Quick Money) and 15% of the underlying loans would have defaulted, the loss for Big Bank would have been exactly $ This would have been (better / worse) than the investment in the tranches.
c. If Big Bank would have invested $20 directly into MBS (the same type of loans as Quick Money) and 15% of the underlying loans would have defaulted, the loss for Big Bank would have been exactly $ This would have been (better / worse) than the investment in the tranches.
Chapter8: Risk And Rates Of Return
Section: Chapter Questions
Problem 7PROB
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Transcribed Image Text:c. If Big Bank would have invested $20 directly into MBS (the same type of loans as Quick Money) and 15% of the underlying loans would have
defaulted, the loss for Big Bank would have been exactly $
This would have been
(better / worse) than the investment in the tranches.
d. Continue with your balance sheet from b) after the losses. If Big Bank would swap all its loans against Quick Money A3 tranches, its RWA
would change to $
(no rounding!). Check if Big Bank is now achieving its minimum CAR of 10% again.
Transcribed Image Text:Assets
Liabilities and
equity
Cash
$10
Demand
$90
deposits
Quick Money Aaa
$15
Equity
$10
tranche
Quick Money Ba1
$5
tranche
Loans (risk weight
100%)
$70
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