Few doubts in 2006 question paper

[deshvedu]

Q 11.B. The solution says that the two methods of benchmarking best execution for trades are VWAP and the average of low, high open close prices(LHOC) What the heck is LHOC? Isn’t implementation shortfall a benchmark?
Regarding Q 9A. I dint understand when they say that ‘loan has 3% cap rate whereas CD has none. So if int rates increase above cap rate, he would not receive any more income but the cost of funds on floating rate CD would continue to increase’. What income are they talking about and how will the cost of funds increase?
thanks

 

[daveyc18]

This is a bank that’s funding the loan to the hospital via CDs.
The bank is charging LIBOR + 50 bps, and the rate is capped at 300 bps over the initial lending rate (meaning their revenue is capped)
If they issue floating rate CDs, they will have to PAY the buyers the floating rate. The floating rate can increase over the rate of the loan because the rate of the loan is capped; thus, cap risk is not eliminated.
In others, expenses can continue to increase if floating rates continue to go up, while revenue doesn’t because of the cap.
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