Exam 7: Risks of Financial Institutions

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?

The BIS definition: "the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events," encompasses which of the following risks?

Systematic credit risk can be reduced significantly by diversification.

Which of the following would one typically find in the trading portfolio of an FI?

Economies of scale refer to an FI's ability to

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

The risk that a foreign government may devalue the currency relates to

An FI is exposed to reinvestment risk by holding longer-term assets relative to liabilities.

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

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

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

This risk of default is associated with general economy-wide or macro conditions affecting all borrowers.

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

The potential exercise of unanticipated contingencies can result in

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

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.

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

Foreign exchange risk includes interest rate risk and credit risk as well as changes in the foreign exchange rate between two countries.

Funding a portion of assets with equity capital means that hedging risk does not require perfect matching of the assets and liabilities.

When the assets and liabilities of an FI are not equal in size, efficient hedging of interest rate risk can be achieved by