Exam 7: Risks of Financial Institutions

Foreign exchange risk is that the value of assets and liabilities may change because of changes in the foreign exchange rate between two countries.

The risk that a computer system may malfunction during the processing of data is an example of operational risk.

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

Credit risk only exposes the lender to the uncertainty that interest payments may not be received.

Off-balance-sheet activities have become an important source of fee income,even though losses on these activities can cause a financial institution to fail.

FIs that actively trade assets and liabilities are exposed to market risk.

Diversification in the loan portfolio of an FI is intended to reduce systematic risk of each of the loans in the portfolio.

Direct foreign investment and foreign portfolio investment both can be beneficial to an FI because of imperfectly correlated returns with domestic investments.

Insolvency risk is reduced when the leverage of an FI is also reduced.

If an FI holds long-term assets funded by short-term liabilities when interest rates rise,the market value of assets will fall by a greater amount than the market value of its liabilities.

The risk that a German investor who purchases British bonds will lose money when trying to convert bond interest payments made in pounds sterling into euros is called

If the loans in the bank's portfolio are all negatively correlated,what will be the impact on the bank's credit risk exposure?

Interest rate risk management for financial intermediaries deals primarily with

FIs that make long-term loans are less exposed to credit risk than if they make short-term loans.

A small local bank failed because a housing market collapse following the departure of the area's largest employer.What type of risk applies to the failure of the institution?

With regard to market value risk,rising interest rates

Foreign exchange rate risk occurs because foreign exchange rates are volatile and can impact banks with exposed foreign assets and/or liabilities.

Systematic credit risk can be reduced significantly by diversification.

The risk that many borrowers in a particular country fail to repay their loans as a result of a recession in that country relates to

In the case where a borrower defaults on a loan,the FI may lose only a portion of the principal that was loaned.