Question 1

The extremely high growth of OBS activities since the early 1990s has caused regulators to recognize the potential risk exposure to FIs from their use.

Accepted Answer

A) True 
 B)False

Question 2

An "adverse material changes in conditions" clause is included in loan commitments to protect the FI against

Accepted Answer

A) credit risk. 
B) interest rate risk. 
C) takedown risk. 
D) funding risk. 
A) credit risk. 
B) interest rate risk. 
C) takedown risk. 
D) funding risk.

Question 3

In the early 1980s

Accepted Answer

A) banks increased their off-balance-sheet activities to avoid competition from nonbank banks. 
B) banks decreased their off-balance-sheet activities to avoid regulatory taxes. 
C) banks decreased their off-balance-sheet activities to avoid competition from nonbank banks. 
D) banks increased their off-balance-sheet activities to avoid regulatory costs. 
A) banks increased their off-balance-sheet activities to avoid competition from nonbank banks. 
B) banks decreased their off-balance-sheet activities to avoid regulatory taxes. 
C) banks decreased their off-balance-sheet activities to avoid competition from nonbank banks. 
D) banks increased their off-balance-sheet activities to avoid regulatory costs.

Question 4

A corporation is planning to issue $10 million worth of 180-day commercial paper.In order to reduce the interest rates by 25 basis points (per year),it plans to back this issue with a standby letter of credit or a loan commitment.The standby letter of credit is available for 20 basis points (per year)to be paid up-front.The loan commitment for $10 million is available for an up-front fee of 15 basis points (per year)and a 5 basis points back-end fee.

What are the savings to the corporation if it obtains a standby letter of credit to back its $10 million issue of commercial paper?

Accepted Answer

A) $1,250. 
B) $2,500. 
C) $3,750. 
D) $5,000. 
A) $1,250. 
B) $2,500. 
C) $3,750. 
D) $5,000.

Question 5

Which of the following is true of the market price of an options contract over time?

Accepted Answer

A) It is set at time 0. 
B) It is fixed over the life of the contract. 
C) It changes based on the market value of the underlying asset. 
D) It increases with time to expiration. 
A) It is set at time 0. 
B) It is fixed over the life of the contract. 
C) It changes based on the market value of the underlying asset. 
D) It increases with time to expiration.

Question 6

Which of the following situations is similar to the externality effect?

Accepted Answer

A) Exercising an adverse material change in conditions clause as a last resort,thereby canceling or repricing a loan commitment. 
B) Increase in the cost of funds above normal levels while many FIs scramble for funds to meet their commitments to customers during a credit crunch. 
C) In a loan commitment,the borrower takes down only part of the funds over the specified time-period. 
D) The buyer of a commercial letter of credit fails to perform as promised under a contractual obligation. 
A) Exercising an adverse material change in conditions clause as a last resort,thereby canceling or repricing a loan commitment. 
B) Increase in the cost of funds above normal levels while many FIs scramble for funds to meet their commitments to customers during a credit crunch. 
C) In a loan commitment,the borrower takes down only part of the funds over the specified time-period. 
D) The buyer of a commercial letter of credit fails to perform as promised under a contractual obligation.

Question 7

Which of the following observations is NOT true?

Accepted Answer

A) The settlement risk that an FI is exposed to within-day appears on its balance sheet. 
B) Settlement Risk is a form of OBS risk that FIs participating on private wholesale wire transfer system networks face. 
C) A holding company is a corporation that owns more than 25 percent of the shares of other corporations. 
D) Failure of an affiliated firm or bank imposes affiliate risk on another bank in a holding company structure in a number of ways. 
A) The settlement risk that an FI is exposed to within-day appears on its balance sheet. 
B) Settlement Risk is a form of OBS risk that FIs participating on private wholesale wire transfer system networks face. 
C) A holding company is a corporation that owns more than 25 percent of the shares of other corporations. 
D) Failure of an affiliated firm or bank imposes affiliate risk on another bank in a holding company structure in a number of ways.

Question 8

A default option is exercised when the holder requests a draw on the loan commitment.

Accepted Answer

A) True 
 B)False

Question 9

The delta of an option is the sensitivity of an option's value to a unit change in the value of the underlying asset.

Accepted Answer

A) True 
 B)False

Question 10

FIs are competing directly with loan commitments,one of their own OBS products,when they also offer

Accepted Answer

A) Futures contracts. 
B) Swaps. 
C) Standby letters of credit. 
D) Forward contracts. 
A) Futures contracts. 
B) Swaps. 
C) Standby letters of credit. 
D) Forward contracts.

Question 11

More FIs fail as a result of credit risk exposures than either interest rate or foreign exchange (FX)risk exposure.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements best describe a derivative contract?

Accepted Answer

A) Contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B) Contingent guarantees sold by an FI to underwrite the performance of the buyer of the guaranty. 
C) Agreement between two parties to exchange a standard quantity of an asset at a predetermined price at a specified date in the future. 
D) Trading in securities prior to their actual issue. 
A) Contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B) Contingent guarantees sold by an FI to underwrite the performance of the buyer of the guaranty. 
C) Agreement between two parties to exchange a standard quantity of an asset at a predetermined price at a specified date in the future. 
D) Trading in securities prior to their actual issue.

Question 13

If an FI is a counterparty to a swap arrangement,it must record the notational value of the swap as the market value.

Accepted Answer

A) True 
 B)False

Question 14

Derivative products used in managing contingent credit risk can only be acquired as over-the-counter arrangements.

Accepted Answer

A) True 
 B)False

Question 15

If an option's price increases 1.4 percent for every 2 percent change in the price of the underlying security,what is the value of the option's delta?

Accepted Answer

A) 0.60. 
B) 1.40. 
C) 0.70. 
D) 2.00. 
A) 0.60. 
B) 1.40. 
C) 0.70. 
D) 2.00.

Question 16

The ability to provide loan commitments is a signal to borrowers that the FI has a lower risk portfolio.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following ratios do FIs and regulators often use as a simple measure of solvency?

Accepted Answer

A) Current ratio. 
B) Capital to assets. 
C) Earnings before interest and taxes to total assets. 
D) Quick ratio. 
A) Current ratio. 
B) Capital to assets. 
C) Earnings before interest and taxes to total assets. 
D) Quick ratio.

Question 18

An up-front fee on a loan commitment rewards the FI for its willingness to stand ready to lend the commitment amount during some agreed upon time period.

Accepted Answer

A) True 
 B)False

Question 19

As of 2015,the top 25 U.S.commercial banks accounted for ________ percent of OBS derivative contracts among FDIC-insured institutions.

Accepted Answer

A) 100 
B) 99.8 
C) 92.6 
D) 81.9 
A) 100 
B) 99.8 
C) 92.6 
D) 81.9

Question 20

One way to minimize contingent credit risk is to use derivative products sold on organized exchanges.

Accepted Answer

A) True 
 B)False

Exam 16: Off-Balance-Sheet Risk

The extremely high growth of OBS activities since the early 1990s has caused regulators to recognize the potential risk exposure to FIs from their use.

An "adverse material changes in conditions" clause is included in loan commitments to protect the FI against

In the early 1980s

Which of the following is true of the market price of an options contract over time?

Which of the following situations is similar to the externality effect?

Which of the following observations is NOT true?

A default option is exercised when the holder requests a draw on the loan commitment.

The delta of an option is the sensitivity of an option's value to a unit change in the value of the underlying asset.

FIs are competing directly with loan commitments,one of their own OBS products,when they also offer

More FIs fail as a result of credit risk exposures than either interest rate or foreign exchange (FX)risk exposure.

Which of the following statements best describe a derivative contract?

If an FI is a counterparty to a swap arrangement,it must record the notational value of the swap as the market value.

Derivative products used in managing contingent credit risk can only be acquired as over-the-counter arrangements.

If an option's price increases 1.4 percent for every 2 percent change in the price of the underlying security,what is the value of the option's delta?

The ability to provide loan commitments is a signal to borrowers that the FI has a lower risk portfolio.

Which of the following ratios do FIs and regulators often use as a simple measure of solvency?

An up-front fee on a loan commitment rewards the FI for its willingness to stand ready to lend the commitment amount during some agreed upon time period.

As of 2015,the top 25 U.S.commercial banks accounted for ________ percent of OBS derivative contracts among FDIC-insured institutions.

One way to minimize contingent credit risk is to use derivative products sold on organized exchanges.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters