Exam 4: Risk of Financial Institutions

Which of the following are typical operational risk sources?

Why are depository institutions and life insurance companies more exposed to credit risk than, for instance, money market managed funds and general insurance companies?

The major source of risk exposure resulting from issuance of standby letters of credit is:

An FI that matches the maturities of its assets and liabilities is perfectly hedged against interest rate risk.

Credit risk puts both the principal loaned and expected interest payments at risk. As a result FIs issue financial claims that have a risk-return profile with:

Economies of scope imply an FI's ability to lower its average cost by expanding its output of financial services.

The risk that interest income will increase at a slower rate than interest expense is:

In which of the following situations is an Australian FI exposed to a depreciation of the euro against the Australian dollar?

The Bank for International Settlements:

Technological risk:

The risk that borrowers are unable to repay their loans on time is called:

Which function of an FI involves buying primary securities and issuing secondary securities?

An example of a discrete risk is sudden changes in:

Which of the following situations pose a refinancing risk for an FI?

Sovereign risk refers to the risk that repayments from:

The risk that a debt security's price will fall, subjecting the investor to a capital loss is:

Technological failure, employee fraud and employee errors are all sources of operational risk.

One of the most striking trends for many modern FIs has been the growth in their off-balance-sheet activities and thus their off-balance-sheet risk. Explain what is meant by off-balance-sheet activities and the risk associated with it using an example.

Firm-specific credit risk can be eliminated by diversification.

An FI that only operates domestically is never exposed to foreign exchange rate risk.