Exam 7: Risks of Financial Institutions

As commercial banks move from their traditional banking activities of deposit taking and lending and shift more of their activities to trading, they are more subject to

Unanticipated withdrawals by liability holders are a major part of liquidity risk.

The risk that an FI may not have enough capital to offset a sudden decline in the value of its assets relative to its liabilities is referred to as

An FI is net long in foreign assets if it holds more foreign liabilities than foreign assets.

What is the net interest income in dollars if the spot prices at the end of the year are $1.50/£ and €1.65/$?

FIs that make loans or buy bonds with long maturity liabilities are more exposed to interest rate risk than FIs that make loans or buy bonds with short maturity liabilities.

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

The risk that borrowers are unable to repay their loans on time is

Which term refers to the risk that the cost of rolling over or re-borrowing funds will rise above the returns being earned on asset investments?

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

Managerial monitoring efficiency and credit risk management strategies affect the shape of the risk of the loan return distribution.

Which of the following observations is NOT true of a letter of credit?

Matching the foreign currency book of assets and liability maturity does not protect the FI from

An FI that finances a euro (€) loan with U.S. dollar ($) deposits is exposed to

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

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

Returns from domestic and foreign investments may not be perfectly correlated because of different economic infrastructures and growth rates.

Contingent claims are assets and liabilities that will come into existence at a future time often at the insistence of a customer or second party.

Interest rate risk stems from the impact of both anticipated and unanticipated changes in interest rates on FI profitability.

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