Question 1

The extremely high growth of OBS activities since the early 1990s has caused regulators to recognize the potential risk exposure to FIs from their use.

Accepted Answer

A) True 
 B)False

Question 2

Interest rate risk is part of the loan commitment contingent risk because of the uncertainty of changes in interest rates before the borrower exercises his option to borrow.

Accepted Answer

A) True 
 B)False

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

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. Assume 50 percent of the loan is drawn and that there are reserve requirements of 10 percent on demand deposits.What should the bank charge as back-end fees if they require an expected return of 13.63 percent? Do not take future values of fees or interest income received.

Accepted Answer

A) 5 basis points. 
B) 10 basis points. 
C) 15 basis points. 
D) 20 basis points. 
E) 25 basis points. 
A) 5 basis points. 
B) 10 basis points. 
C) 15 basis points. 
D) 20 basis points. 
E) 25 basis points.

Question 5

An FI has assets of $800 million and liabilities of $740 million. 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).

Accepted Answer

A) -$60 million. 
B) $60 million. 
C) $70 million. 
D) -$160 million. 
E) $190 million. 
A) -$60 million. 
B) $60 million. 
C) $70 million. 
D) -$160 million. 
E) $190 million.

Question 6

The use of an up-front fee by a bank eliminates the contingent risk on a loan commitment.

Accepted Answer

A) True 
 B)False

Question 7

The increased regulation of the derivatives markets was intended to achieve which of the following objectives?

Accepted Answer

A) prevent activities in those markets from posing risk to the financial system. 
B) promote the efficiency and transparency of those markets 
C) prevent market manipulation, fraud, and other market abuses 
D) ensure that OTC derivatives are not marked inappropriately to unsophisticated parties. 
E) All of the above. 
A) prevent activities in those markets from posing risk to the financial system. 
B) promote the efficiency and transparency of those markets 
C) prevent market manipulation, fraud, and other market abuses 
D) ensure that OTC derivatives are not marked inappropriately to unsophisticated parties. 
E) All of the above.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

An FI has assets of $800 million and liabilities of $740 million. If the FI bought call options on bonds with a face value of $50 million, what is the minimum amount of the stockholder's potential true net worth?

Accepted Answer

A) $10 million. 
B) $70 million. 
C) $110 million. 
D) $790 million. 
E) $850 million. 
A) $10 million. 
B) $70 million. 
C) $110 million. 
D) $790 million. 
E) $850 million.

Question 10

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

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.

Question 11

FIs generally include when-issued OBS items as part of their holdings of option contracts.

Accepted Answer

A) True 
 B)False

Question 12

Off-balance-sheet activities are an important source of fee income for many FIs.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) Expansionary monetary policy actions of the Federal Reserve. 
B) FI's increased aversion toward lending. 
C) Shift to the right in the loan supply function at all interest rates. 
D) Low aggregate demand from borrowers to take down loan commitments. 
E) Decrease in cost of funds. 
A) Expansionary monetary policy actions of the Federal Reserve. 
B) FI's increased aversion toward lending. 
C) Shift to the right in the loan supply function at all interest rates. 
D) Low aggregate demand from borrowers to take down loan commitments. 
E) Decrease in cost of funds.

Question 14

More FIs fail as a result of credit risk exposures than either interest rate or foreign exchange (FX) risk exposure.

Accepted Answer

A) True 
 B)False

The extremely high growth of OBS activities since the early 1990s has caused regulators to recognize the potential risk exposure to FIs from their use.

Interest rate risk is part of the loan commitment contingent risk because of the uncertainty of changes in interest rates before the borrower exercises his option to borrow.

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.

An FI has assets of $800 million and liabilities of $740 million. 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).

The use of an up-front fee by a bank eliminates the contingent risk on a loan commitment.

The increased regulation of the derivatives markets was intended to achieve which of the following objectives?

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

An FI has assets of $800 million and liabilities of $740 million. If the FI bought call options on bonds with a face value of $50 million, what is the minimum amount of the stockholder's potential true net worth?

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

FIs generally include when-issued OBS items as part of their holdings of option contracts.

Off-balance-sheet activities are an important source of fee income for many FIs.

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

More FIs fail as a result of credit risk exposures than either interest rate or foreign exchange (FX) risk exposure.

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

Exam 16: Off-Balance-Sheet Risk

The extremely high growth of OBS activities since the early 1990s has caused regulators to recognize the potential risk exposure to FIs from their use.

Interest rate risk is part of the loan commitment contingent risk because of the uncertainty of changes in interest rates before the borrower exercises his option to borrow.

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.

An FI has assets of $800 million and liabilities of $740 million. 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).

The use of an up-front fee by a bank eliminates the contingent risk on a loan commitment.

The increased regulation of the derivatives markets was intended to achieve which of the following objectives?

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

An FI has assets of $800 million and liabilities of $740 million. If the FI bought call options on bonds with a face value of $50 million, what is the minimum amount of the stockholder's potential true net worth?

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

FIs generally include when-issued OBS items as part of their holdings of option contracts.

Off-balance-sheet activities are an important source of fee income for many FIs.

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

More FIs fail as a result of credit risk exposures than either interest rate or foreign exchange (FX) risk exposure.

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