Applied Economics

Question

Thanks for your help!

expertsolution · Answer

please find the attachment. i have done this with much efforts. read this carefully all and develop your learning and knowledge and then use this. if you have any query just send me a message.  thanks
best of luck :)
regards,
dr. charles kennedy (expertsolution)........................................

muhammadnurarasy · Answer

question 1:this question involves a bit of probability and decision theory. here's a simplified approach:i. the repayment that the bank will charge in the first period (rw) will be based on the expected return from both types of borrowers. since the bank cannot distinguish between high and low-risk borrowers, it will calculate the expected return as a weighted average of the returns from both types of borrowers. the bank's first period profit (π1) will be the total repayment received minus the amount loaned out.ii. the posterior probabilities can be calculated using bayes' theorem. for example, pr(g|s), the probability of a borrower being low risk given that the project was successful, can be calculated as [pr(s|g) * pr(g)] / pr(s), where pr(s|g) is the probability of success given a low-risk borrower, pr(g) is the prior probability of a borrower being low risk, and pr(s) is the total probability of success.iii. the amount the bank will charge in the second period will depend on the success or failure of the borrower in the first period. if the borrower was successful in the first period, the bank may charge a lower amount in the second period due to the lower perceived risk. the bank's second period profit (π2) will be the total repayment received in the second period minus the amount loaned out. the total profit across the two periods will be π1 + π2.question 2:a) securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security. a typical example is a mortgage-backed security (mbs), which is a type of asset-backed security that is secured by a collection of mortgages.b) mortgage securitization has several benefits. for borrowers, it can lead to lower interest rates and more availability of credit. for issuers, it allows them to remove loans from their balance sheets and free up capital. for investors, it provides a new asset class with potentially attractive returns. factors that limit securitization include legal and regulatory issues, market conditions, and the complexity of the securitization process.c) basel ii is a set of international banking regulations put forth by the basel committee on bank supervision. it focuses on three main areas, also known as the three pillars: minimum capital requirements, supervisory review, and market discipline. it represents an evolution from basel i by introducing more sensitive and risk-focused approaches to calculate capital requirements.d) banks are regulated to ensure the stability and integrity of the financial system, protect consumers, and prevent financial crimes. capital regulation, such as that proposed in basel i, is designed to ensure that banks maintain a minimum level of capital to protect against potential losses. basel i focused primarily on credit risk and prescribed a uniform requirement of 8% capital to risk-weighted assets.

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Applied Economics

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