Fifth Bank has the following balance sheet with values stated in millions of dollars.All assets are associated with corporate customers (not governments or sovereigns).Refer to Table 20-8 for associated risk weights. $\begin{array}{ll}
\text { Cash } & \$ 80& \text { Deposits } &\$550\
\text { Municipal General Obligation } & \$ 100 \
\text { Bonds } & \
\text { Residential Mortgages 1-4 } & \$ 220& \text { Long-Term Debt }&\$290 \
\text { family (LTV 60\%-80\%) } & \
\text { Conmercial loans } & \$ 500&\text { Equity } & \$60 \
\text { Total Assets } & \$ 900&&\$ 900
\end{array}$ In addition,Fifth Bank has off-balance sheet items as follows: (Refer to Tables 20-10 and 20-11)
$50 million in commercial letters of credit (LCs),
$300 million in 3-year interest rate swaps that are in-the-money by $2 million
$50 million in 4-year forward FX contracts that are out-of-the money by $2 million
What are,respectively,the credit equivalent value of the letters of credit,interest rate swaps,and FX contracts?

Question

Fifth Bank has the following balance sheet with values stated in millions of dollars.All assets are associated with corporate customers (not governments or sovereigns).Refer to Table 20-8 for associated risk weights. $\begin{array}{ll}
\text { Cash } & \$ 80& \text { Deposits } &\$550\
\text { Municipal General Obligation } & \$ 100 \
\text { Bonds } & \
\text { Residential Mortgages 1-4 } & \$ 220& \text { Long-Term Debt }&\$290 \
\text { family (LTV 60\%-80\%) } & \
\text { Conmercial loans } & \$ 500&\text { Equity } & \$60  \
\text { Total Assets } & \$ 900&&\$ 900
\end{array}$ In addition,Fifth Bank has off-balance sheet items as follows: (Refer to Tables 20-10 and 20-11)
$50 million in commercial letters of credit (LCs),
$300 million in 3-year interest rate swaps that are in-the-money by $2 million
$50 million in 4-year forward FX contracts that are out-of-the money by $2 million
What are,respectively,the credit equivalent value of the letters of credit,interest rate swaps,and FX contracts?

Quizplus · Accepted Answer

The credit equivalent value of the letters of credit is equal to the full amount of $50 million, since commercial letters of credit have a risk weight of 100%. 
The credit equivalent value of the in-the-money interest rate swaps is equal to the positive mark-to-market value of $2 million. 
The credit equivalent value of the out-of-the-money forward FX contracts is equal to the potential future exposure (PFE) of $2 million, since the risk weight for FX contracts is 100%. 
Therefore, the total credit equivalent value is $10.0 million + $3.5 million + $5.0 million = $18.5 million. $\underline{\text{ Letter of Credit }}$ 
 Refer to Table 20-10
 Commercial letters of credit conversion factor = 20 percent
 Credit equivalent amount = (Face Value OBS item * conversion factor)
 CEAlc= $50 * 0.20 = $10 million
 
$\underline{\text{ Interest rate swap }}$ 
 Refer to Table 20-11
 3-year interest rate swap credit conversion factor = 0.5 percent
 Credit equivalent amount = (Notational value * Potential exposure conversion factor) + replacement cost if greater than zero.
 CEAswap= ($300 * 0.005) + $2 = $1.5 million + $2 million = $3.5 million
 
$\underline{\text{ FX forward contract }}$  
 Refer to Table 20-11
 One to 5 year foreign exchange rate contract credit conversion factor = 5.0 percent
 Credit equivalent amount = (Notational value * Potential exposure conversion factor) + replacement cost if greater than zero.
 CEAFX= ($100 * 0.05) + $0 = $5 million + $0 = $5 million.

Fifth Bank Has the Following Balance Sheet with Values Stated