Exam 16: Off-Balance-Sheet Risk

Loans sold without recourse have contingent liability off-balance-sheet implications for the FI that sells the loan.

The effect to an FI of default by the counterparty to a derivative contract is LEAST serious with

Which of the following are contracts that give the holder the right,but not the obligation,to buy or sell an underlying asset at a pre-specified price for a specified time period?

Off-balance sheet positions are risky because they may yield negative future cash flows.

The estoppel argument used in bank failures is based on the concept of financial unsophistication.

Contingent credit risk occurs with the use of derivative products and involves the potential default by a counterparty.

Sun Bank has issued a one-year $5 million loan commitment to a customer for an up-front fee of 15 basis points and at a fixed rate of 12 percent.The back-end fee for the unused portion of the commitment is 5 basis points.The bank requires a 10 percent compensating balance in demand deposits.Reserve requirements on demand deposits are 10 percent. What is the expected return on the loan to the bank if 50 percent of the loan is drawn using discounted cash flows? That is,the return has to be estimated at the beginning of the loan period using present values.Assume there are reserve requirements of 10 percent on demand deposits.

The amount of regulations that have been proposed because of the increased use of risk-reducing OBS derivatives is increasing.

The use of an up-front fee by a bank eliminates the contingent risk on a loan commitment.