Exam 16: Off-Balance-Sheet Risk

A $200 million loan commitment has an up-front fee of 20 basis points and a back-end fee of 25 basis points on the unused portion. -If the FI had contingent assets of $40 million and contingent liabilities of $160 million, calculate the stockholder's true net worth (ignore the option mentioned in previous question).

A $200 million loan commitment has an up-front fee of 20 basis points and a back-end fee of 25 basis points on the unused portion. -The up-front fee is

What is a possible reason behind restricted supply of spot loans to borrowers during a credit crunch?

The aggregate commitment funding risk can increase the cost of funds above normal levels.

All off-balance-sheet items will eventually move on to the balance sheet at some point in time.

Commercial letters of credit are used only in international trade.

When an FI pre-commits to lending at a fixed rate, it is exposed to

Funds transferred on CHIPS are settled immediately.

To be an affiliate of a holding company, the parent must own at least 50 percent of the shares of the affiliate company.

Fees from derivative products are an increasing component of noninterest income for many FIs.

Which of the following is true of the market price of a futures contract over time?

The delta of an option is

All call options are eventually exercised and the underlying asset must be delivered.

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

Basis risk occurs on a loan commitment because the spread of a pricing index over the cost of funds may vary.

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.

One way to completely protect the lender against interest rate risk on a loan commitment is for the lender to price the loan at a variable rate against some index.

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

Back-end fees on loan commitments are charged as a certain percentage of

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