Question 1

Which of the following refers to an FI's ability to generate cost synergies by producing more than one output with the same inputs?

Accepted Answer

A) Market intermediation. 
B) Economies of scope. 
C) Break-even point. 
D) Economies of scale. 
E) Business continuity plan. 
A) Market intermediation. 
B) Economies of scope. 
C) Break-even point. 
D) Economies of scale. 
E) Business continuity plan.

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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 4

A natural consequence of the effects of realized liquidity risk across several institutions is the ability to recognize capital gains on the sale of assets in the attempt to generate cash.

Accepted Answer

A) True 
 B)False

Question 5

Which term refers to the risk that interest income will decrease as maturing assets are replaced with new, more current assets?

Accepted Answer

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

Question 6

The major source of risk exposure resulting from issuance of standby letters of credit is

Accepted Answer

A) technology risk. 
B) interest rate risk. 
C) credit risk. 
D) foreign exchange risk. 
E) off-balance-sheet risk. 
A) technology risk. 
B) interest rate risk. 
C) credit risk. 
D) foreign exchange risk. 
E) off-balance-sheet risk.

Question 7

The relationship of a limited or fixed upside return with a high probability and the potential large downside loss with a small probability is an example of an asset's credit risk to an FI.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Foreign exchange risk is that the value of assets and liabilities may change because of changes in the level of interest rates.

Accepted Answer

A) True 
 B)False

Question 10

Holding corporate bonds with fixed interest rates involves

Accepted Answer

A) default risk only. 
B) interest rate risk only. 
C) liquidity risk and interest rate risk only. 
D) default risk and interest rate risk. 
E) default and liquidity risk only. 
A) default risk only. 
B) interest rate risk only. 
C) liquidity risk and interest rate risk only. 
D) default risk and interest rate risk. 
E) default and liquidity risk only.

Question 11

FIs typically are concerned about the value at risk of their trading portfolios.

Accepted Answer

A) True 
 B)False

Question 12

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 above. 
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 above.

Question 13

Sovereign risk involves the inability of a foreign corporation to repay the principal or interest on a loan because of stipulations by the foreign government that are out of the control of the foreign corporation.

Accepted Answer

A) True 
 B)False

Question 14

Firm-specific credit risk can be eliminated by diversification.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

The asymmetric return distribution (relatively high probability of anticipated return; lower probability of default) on risky debt exposes the FI to

Accepted Answer

A) technology risk. 
B) interest rate risk. 
C) credit risk. 
D) foreign exchange risk. 
E) off-balance-sheet risk. 
A) technology risk. 
B) interest rate risk. 
C) credit risk. 
D) foreign exchange risk. 
E) off-balance-sheet risk.

Question 17

Because the economies of the U.S. and other overseas countries have become more integrated, the risks of financial intermediation have decreased.

Accepted Answer

A) True 
 B)False

Question 18

When the U.S. dollar declines against European currencies, it is

Accepted Answer

A) potentially harmful for European banks only. 
B) potentially harmful for U.S.banks only. 
C) potentially harmful for those banks that have financed U.S.dollar assets with liabilities denominated in European currencies. 
D) potentially harmful for those banks that have financed European currency assets with U.S.dollar liabilities. 
E) irrelevant for global banks. 
A) potentially harmful for European banks only. 
B) potentially harmful for U.S.banks only. 
C) potentially harmful for those banks that have financed U.S.dollar assets with liabilities denominated in European currencies. 
D) potentially harmful for those banks that have financed European currency assets with U.S.dollar liabilities. 
E) irrelevant for global banks.

Question 19

Off-balance-sheet risk occurs because of activities that do not appear on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 20

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?

Accepted Answer

A) Firm-specific risk. 
B) Technological risk. 
C) Operational risk. 
D) Sovereign risk. 
E) Insolvency risk. 
A) Firm-specific risk. 
B) Technological risk. 
C) Operational risk. 
D) Sovereign risk. 
E) Insolvency risk.

Exam 7: Risks of Financial Institutions

Which of the following refers to an FI's ability to generate cost synergies by producing more than one output with the same inputs?

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

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

A natural consequence of the effects of realized liquidity risk across several institutions is the ability to recognize capital gains on the sale of assets in the attempt to generate cash.

Which term refers to the risk that interest income will decrease as maturing assets are replaced with new, more current assets?

The major source of risk exposure resulting from issuance of standby letters of credit is

The relationship of a limited or fixed upside return with a high probability and the potential large downside loss with a small probability is an example of an asset's credit risk to an FI.

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

Foreign exchange risk is that the value of assets and liabilities may change because of changes in the level of interest rates.

Holding corporate bonds with fixed interest rates involves

FIs typically are concerned about the value at risk of their trading portfolios.

Economically speaking, OBS activities are contractual claims that

Sovereign risk involves the inability of a foreign corporation to repay the principal or interest on a loan because of stipulations by the foreign government that are out of the control of the foreign corporation.

Firm-specific credit risk can be eliminated by diversification.

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

The asymmetric return distribution (relatively high probability of anticipated return; lower probability of default) on risky debt exposes the FI to

Because the economies of the U.S. and other overseas countries have become more integrated, the risks of financial intermediation have decreased.

When the U.S. dollar declines against European currencies, it is

Off-balance-sheet risk occurs because of activities that do not appear on the balance sheet.

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?

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

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