Question 1

Where are the contingent items disclosed in the financial statements?

Accepted Answer

A) On the assets side of the balance sheet. 
B) On the liabilities side of the balance sheet. 
C) As footnotes to financial statements. 
D) In the income statement. 
E) In the director's report. 
A) On the assets side of the balance sheet. 
B) On the liabilities side of the balance sheet. 
C) As footnotes to financial statements. 
D) In the income statement. 
E) In the director's report. C

Question 2

The quantity risk exposure of a loan commitment is

Accepted Answer

A) credit risk. 
B) interest rate risk. 
C) takedown risk. 
D) funding risk. 
E) exchange rate risk. 
A) credit risk. 
B) interest rate risk. 
C) takedown risk. 
D) funding risk. 
E) exchange rate risk. C

Question 3

Which of the following is the newest addition to the derivative securities markets?

Accepted Answer

A) Options contracts. 
B) Futures contracts. 
C) Swap agreements. 
D) Forward contracts. 
E) Credit derivatives. 
A) Options contracts. 
B) Futures contracts. 
C) Swap agreements. 
D) Forward contracts. 
E) Credit derivatives. E

Question 4

Which of the following observations is NOT true?

Accepted Answer

A) The settlement risk that an FI is exposed to within-day appears on its balance sheet. 
B) Settlement Risk is a form of OBS risk that FIs participating on private wholesale wire transfer system networks face. 
C) A holding company is a corporation that owns more than 25 percent of the shares of other corporations. 
D) Failure of an affiliated firm or bank imposes affiliate risk on another bank in a holding company structure in a number of ways. 
E) Investors do not distinguish between the failing corporation and its surviving affiliate because of name similarity. 
A) The settlement risk that an FI is exposed to within-day appears on its balance sheet. 
B) Settlement Risk is a form of OBS risk that FIs participating on private wholesale wire transfer system networks face. 
C) A holding company is a corporation that owns more than 25 percent of the shares of other corporations. 
D) Failure of an affiliated firm or bank imposes affiliate risk on another bank in a holding company structure in a number of ways. 
E) Investors do not distinguish between the failing corporation and its surviving affiliate because of name similarity.

Question 5

The estoppel argument used in bank failures is based on the concept of financial unsophistication.

Accepted Answer

A) True 
 B)False

Question 6

The present value of an off-balance-sheet item is referred to as its notional value.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

If an option's price increases 1.4 percent for every 2 percent change in the price of the underlying security, what is the value of the option's delta?

Accepted Answer

A) 0.60. 
B) 1.40. 
C) 0.70. 
D) 2.00. 
E) 3.00. 
A) 0.60. 
B) 1.40. 
C) 0.70. 
D) 2.00. 
E) 3.00.

Question 9

The source of strength doctrine involving failed FIs in multibank holding company corporate structures has been widely accepted by the courts.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Standby letters of credit perform an insurance function similar to that of commercial and trade letters of credit.

Accepted Answer

A) True 
 B)False

Question 12

Off-balance sheet positions are risky because they may yield negative future cash flows.

Accepted Answer

A) True 
 B)False

Question 13

If an FI is a counterparty to a swap arrangement, it must record the notational value of the swap as the market value.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Takedown risk in a loan commitment exposes the FI to

Accepted Answer

A) immediate liquidity risk. 
B) basis risk. 
C) spread risk. 
D) externality effects. 
E) future liquidity risk. 
A) immediate liquidity risk. 
B) basis risk. 
C) spread risk. 
D) externality effects. 
E) future liquidity risk.

Question 16

The National Information Center (NIC) provides an annual list of holding companies with assets greater than $20 billion on its website.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

In the U.S., commercial banks are the only issuers of standby letters of credit.

Accepted Answer

A) True 
 B)False

Question 19

To avoid being exposed to dramatic declines in borrower creditworthiness over the commitment period, most FIs include an adverse material change in conditions clause by which the FI can cancel or reprice a loan commitment.

Accepted Answer

A) True 
 B)False

Question 20

Funds transferred on Fedwire are settled at the end of the day.

Accepted Answer

A) True 
 B)False

Exam 16: Off-Balance-Sheet Risk

Where are the contingent items disclosed in the financial statements?

The quantity risk exposure of a loan commitment is

Which of the following is the newest addition to the derivative securities markets?

Which of the following observations is NOT true?

The estoppel argument used in bank failures is based on the concept of financial unsophistication.

The present value of an off-balance-sheet item is referred to as its notional value.

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

If an option's price increases 1.4 percent for every 2 percent change in the price of the underlying security, what is the value of the option's delta?

The source of strength doctrine involving failed FIs in multibank holding company corporate structures has been widely accepted by the courts.

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

Standby letters of credit perform an insurance function similar to that of commercial and trade letters of credit.

Off-balance sheet positions are risky because they may yield negative future cash flows.

If an FI is a counterparty to a swap arrangement, it must record the notational value of the swap as the market value.

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

Takedown risk in a loan commitment exposes the FI to

The National Information Center (NIC) provides an annual list of holding companies with assets greater than $20 billion on its website.

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

In the U.S., commercial banks are the only issuers of standby letters of credit.

To avoid being exposed to dramatic declines in borrower creditworthiness over the commitment period, most FIs include an adverse material change in conditions clause by which the FI can cancel or reprice a loan commitment.

Funds transferred on Fedwire are settled at the end of the day.

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

Risks of Financial Institutions

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

Technology and Other Operational Risks

Fintech 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