Exam 7: Risks of Financial Institutions

Contingent claims are assets and liabilities that will come into existence at a future time often due to a customer's action.

General macroeconomic risks may affect all risks of a financial institution.

Exactly matching the maturities of assets and liabilities will provide a perfect hedge against interest rate risk for an FI.

An FI that has liability maturities longer than asset maturities faces the risk that the return of reinvesting assets could exceed the cost of funding those assets.

Credit risk stems from non-repayment or delays in repayment of either principal or interest on FI assets.

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

What type of risk focuses upon future contingencies?

Individuals have an advantage over FIs in that individuals more easily can diversify away some of the credit risk of their asset portfolios.

Event risks often cause sudden and unanticipated changes in financial market conditions.

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

Similar to loans,non-government bonds expose a lender to principal payment default risk.

Market risk is present whenever an FI takes an open position in an asset and prices change in a direction opposite to that expected.

Many of the various risks faced by an FI often are interrelated with each other.

The risk that many depositors withdraw their funds from an FI at once is

The merger of Citicorp with Travelers Insurance is an example of an attempt to exploit economies of scope.

Control of the future supply of funds available to a foreign country is one method to ensure the repayment of an existing debt.

A U.S.bank has €40 million in assets and €50 million in CDs.All other assets and liabilities are in U.S.dollars.This bank is

"Matching the book" or trying to match the maturities of assets and liabilities is intended to protect the FI from

For an FI to exactly hedge the foreign investment risk,the foreign currency assets must equal the foreign currency liabilities.

Regulation limits FI investment in non-investment grade bonds (rated below Baa or non-rated).What kind of risk is this designed to limit?