Question 1

Sovereign risk can be effectively controlled through the foreign exchange market.

Accepted Answer

A) True 
 B)False

Question 2

An FI is short-funded when the maturity of its liabilities is less than the maturity of its assets.

Accepted Answer

A) True 
 B)False

Question 3

What type of risk focuses upon mismatched asset and liability maturities and durations?

Accepted Answer

A) Liquidity risk. 
B) Interest rate risk. 
C) Credit risk. 
D) Foreign exchange rate risk. 
A) Liquidity risk. 
B) Interest rate risk. 
C) Credit risk. 
D) Foreign exchange rate risk.

Question 4

An FI is only exposed to market risk in its trading portfolio if interest rates change over time.

Accepted Answer

A) True 
 B)False

Question 5

FIs that make loans or buy bonds with long maturity liabilities are more exposed to interest rate risk than FIs that make loans or buy bonds with short maturity liabilities.

Accepted Answer

A) True 
 B)False

Question 6

Millon National Bank has 10 million British pounds (£)in one-year assets and £8 million in one-year liabilities.In addition,it has one-year liabilities of 4 million euros (€).Assets are earning 8 percent and both liabilities are being paid at a rate of 8 percent.All interest and principal will be paid at the end of the year.If the year-end spot exchange rate for the British pound is $1.50/£ and the liabilities pay 8 percent,what is the maximum that the € can appreciate and the bank still maintain a zero profit?

Accepted Answer

A) €1.30/$. 
B) €1.33/$. 
C) €1.35/$. 
D) €1.50/$. 
A) €1.30/$. 
B) €1.33/$. 
C) €1.35/$. 
D) €1.50/$.

Question 7

Historically credit card loans have very low rates of default or credit risk when compared to other assets that an FI may hold.

Accepted Answer

A) True 
 B)False

Question 8

Unanticipated diseconomies of scale or scope are a result of

Accepted Answer

A) interest rate risk. 
B) technology risk. 
C) credit risk. 
D) foreign exchange risk. 
A) interest rate risk. 
B) technology risk. 
C) credit risk. 
D) foreign exchange risk.

Question 9

Which term refers to the risk that the cost of rolling over or re-borrowing funds will rise above the returns being earned on asset investments?

Accepted Answer

A) Reinvestment risk. 
B) Credit risk. 
C) Refinancing risk. 
D) Liquidity risk. 
A) Reinvestment risk. 
B) Credit risk. 
C) Refinancing risk. 
D) Liquidity risk.

Question 10

In which of the following situations would an FI be considered net long in foreign assets if it has ¥100 million in loans?

Accepted Answer

A) ¥120 million in liabilities. 
B) ¥80 million in liabilities. 
C) ¥100 million in liabilities. 
D) ¥110 million in liabilities. 
A) ¥120 million in liabilities. 
B) ¥80 million in liabilities. 
C) ¥100 million in liabilities. 
D) ¥110 million in liabilities.

Question 11

Firm-specific credit risk can be reduced by diversification.

Accepted Answer

A) True 
 B)False

Question 12

Off-balance-sheet activities often affect the shape of an FIs current balance sheet through the creation of contingent claims.

Accepted Answer

A) True 
 B)False

Question 13

FI regulators are not concerned with insolvency risk.

Accepted Answer

A) True 
 B)False

Question 14

The timing of when a contingent claim appears on the balance sheet is up to the FI.

Accepted Answer

A) True 
 B)False

Question 15

Sovereign risk is a different type of credit risk that affects an FI that purchases bonds of foreign corporations and governments.

Accepted Answer

A) True 
 B)False

Question 16

What type of risk focuses upon mismatched currency positions?

Accepted Answer

A) Liquidity risk. 
B) Interest rate risk. 
C) Credit risk. 
D) Foreign exchange rate risk. 
A) Liquidity risk. 
B) Interest rate risk. 
C) Credit risk. 
D) Foreign exchange rate risk.

Question 17

Matching the maturities of assets and liabilities supports the asset transformation function of FIs.

Accepted Answer

A) True 
 B)False

Question 18

Economically speaking,OBS activities are contractual claims that

Accepted Answer

A) may or may not occur. 
B) if the contingency does occur,the asset or liability is transferred onto the FI's balance sheet. 
C) impact the economic value of the equity. 
D) if the contingency never occurs,there is virtually no economic meaning to the OBS activity. 
E) all of the options. 
A) may or may not occur. 
B) if the contingency does occur,the asset or liability is transferred onto the FI's balance sheet. 
C) impact the economic value of the equity. 
D) if the contingency never occurs,there is virtually no economic meaning to the OBS activity. 
E) all of the options.

Question 19

A lower level of equity capital increases the risk of insolvency to a financial institution.

Accepted Answer

A) True 
 B)False

Question 20

Credit risk and interest rate risk cannot affect insolvency risk.

Accepted Answer

A) True 
 B)False

Exam 7: Risks of Financial Institutions

Sovereign risk can be effectively controlled through the foreign exchange market.

An FI is short-funded when the maturity of its liabilities is less than the maturity of its assets.

What type of risk focuses upon mismatched asset and liability maturities and durations?

An FI is only exposed to market risk in its trading portfolio if interest rates change over time.

FIs that make loans or buy bonds with long maturity liabilities are more exposed to interest rate risk than FIs that make loans or buy bonds with short maturity liabilities.

Historically credit card loans have very low rates of default or credit risk when compared to other assets that an FI may hold.

Unanticipated diseconomies of scale or scope are a result of

Which term refers to the risk that the cost of rolling over or re-borrowing funds will rise above the returns being earned on asset investments?

In which of the following situations would an FI be considered net long in foreign assets if it has ¥100 million in loans?

Firm-specific credit risk can be reduced by diversification.

Off-balance-sheet activities often affect the shape of an FIs current balance sheet through the creation of contingent claims.

FI regulators are not concerned with insolvency risk.

The timing of when a contingent claim appears on the balance sheet is up to the FI.

Sovereign risk is a different type of credit risk that affects an FI that purchases bonds of foreign corporations and governments.

What type of risk focuses upon mismatched currency positions?

Matching the maturities of assets and liabilities supports the asset transformation function of FIs.

Economically speaking,OBS activities are contractual claims that

A lower level of equity capital increases the risk of insolvency to a financial institution.

Credit risk and interest rate risk cannot affect insolvency risk.

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

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

Off-Balance-Sheet 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