Question

QUESTION FOUR (20 MARKS)

1. A protection buyer purchases 6-year protection on a company at a default swap spread of 400bp. The face value of the protection is K1, 000,000 million. What is the premium payment per year assuming that payments are done monthly? (4 Marks)
2. Explain the difference between the basic indicator approach, the standardized approach, and the advanced measurement approach for calculating operational risk under Basel II (6 Marks)
3. Explain the FIVE Pillars under Basel III AND What is securitization? (3 Marks)
4. A typical securitisation transaction involves the pooling of assets that are then transferred to a special purpose vehicle that in turn finances the purchase through the issuance of securities backed by the pool. This process involves a number of participants. List and explain the 8 participants and also aid your explanation with a diagram the process of securitization. (8 Marks)
5. Explain in detail the relationship between securitisation and the credit crunch of 2007?                                                           (5 Marks)
6. The Z-score uses multiple corporate income and balance sheet values to measure the financial health of a company. Assess the credit risk (z-score) of a potential borrowing firm with the following financial ratios: X1 = 0.2, X2 = 0, X3 = 0.2, X4 = 0.1, X5 = 2.0 (4marks)

Answer 1

anits It is and set up of low Securitisation A typical sewritisation transachon involve the pooling of that are then transferred to a SPV that in turn finances the purchases through the issuance of securities backed by the pool This procen involves a number er of participants 1) Originator The entity which generates or owns the defined or identifiable cash flow Eg is retail bank because it sewritises anets. 2) Arranger typically a financial institution appointed to by originator design the sewritization structure. Mayor functions done by it are i) It determines the stoucture the risk profice of the receivables to create different tranches SPV Coll) up of sewrity. (1) It sets credit enhancement designs and liquidity support 3) special Purpose Vehicle: It is a company that has very equity capital compared to the amount of debt it oinies 4) Investors : - Typically the investors are financial institutions, insurance companies i pension funds, hedge funds, companies HNI. They purchase the sewritia med SPV auording to their risk return preference. 5) Servicers : They collecte the underlying receivables in the capauty of spr's agent for a servicing fee's mentioned in the contract. An originator ar a company within the originator group is often appointed of the securit 6 Rating Agencies: - They rate the credit worthinen a pivotal role in the sewritization procen as the collateral. ultimate appoaises of underlying pool of by spu as a services. and play

7 Enhancement Provider Credit enhancement reduces the risk og default of the debtors on the onderlying amo. It helps to improve liquidity, marketability, appeal and safety of the underlying cash flows. 8) Regulators A lot of regulatory might sewritisation process Hence regulators a se appointed eviues arise in the Diagram Originator Sall of Sale Prowds for Sewritised Pooputy ama Seuritised Proputy Assuu Credit Enhancement Providing Services (Service services Credit Enhancer SPV Ing agent) Notional Fixed-rake Coupon Principal of Bonds Paymewn Investors