Exam 20: Risk Management in Financial Institutions

A bond portfolio manager has a $25 million market value bond portfolio with a 6 year duration. The manager believes interest rates may increase 50 basis points. Which of the following could be used to help limit his risk? I. Sell the bonds forward. II. Buy bond futures contracts. III. Buy call options on the bonds. IV. Buy put options on the bonds.

A bank has a negative $GAP. If interest rates fall the bank's overall NII will

Refer to the information below for questions XYZ Bank has DA = 2.4 years and DL = 0.9 years. The bank has total equity of $82 million and total assets of $850 million. Currently, interest rates are at 6%. -If interest rates increase 100 basis points the predicted dollar change in equity value will equal

Interest rate collars do which one of the following?

The number of futures contracts that a bank will need in order to fully hedge the bank's overall interest rate risk exposure and protect the bank's net worth depends upon (among other factors): I. The relative duration of bank assets and liabilities. II) The duration of the underlying security named in the futures contract. III) The price of the futures contract. IV) The debt to asset ratio.

Bank A has a loan to deposit ratio of 75%, core deposits equal 62% of total assets and borrowed funds are 5% of assets. Bank B has a loan to deposit ratio of 82%. Core deposits are 55% of assets and borrowed funds are 20% of assets. Which bank has more liquidity risk? Ceteris paribus, which bank will probably be more profitable when interest rates are low and the economy is growing?

The sensitivity of the market price of a financial futures contract to interest rates depends upon the duration of the security to be delivered under the futures contract.

Refer to the information below for questions Formosa International Bank (FIB) (mill$) Funds borrowed \ 6,300 Maximum amount FIB can still borrow \ 8,600 Cash-type assets \ 4,700 Excess cash reserves \ 100 Federal Reserve borrowings \ 200 -What is Formosa International Bank's total net liquidity?

Value at risk (VaR) is to measure price or market risk of a portfolio of assets and attempt to maximum likely loss at a given probability that they might sustain over a designated determine the period of time.

Savings accounts and demand deposits are called

A rate sensitive asset is one that either matures within the maturity bucket or one that will have a payment change within the maturity bucket if interest rates change.

Maximum loan concentration ratios are usually applied to which of the following? I. geographic location II. type of loan III. loans to an individual borrower IV. industry

A bank can purchase a cap on interest rates by

The VaR is typically used to measure a bank's credit risk.

As interest rates increase, a long call option position on a bond decreases in value.

A microhedge is a

Large banks tend to rely more on assets for liquidity and small banks tend to rely more on purchased liquidity.

If a bank has a positive repricing gap, falling interest rates increase profitability.

Writing a call option on a bond pays off if interest rates decrease.

Which one of the following situations creates the most liquidity risk?