You are to prepare a presentation for an upcoming strategic planning meeting at

Question

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.

Explanation / Answer

Answer )

IF all data in question are correct , the answer will be as below

The target hurdle rate( the minimum rate that a company expects to earn) for the company is 15%.

Net income for Product X is .5% and 1.5% for Product Y.

None of the product justify to be invested by the bank to meet the required hurdle rate.

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