Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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.

Question 4

What type of risk focuses upon mismatched currency positions?

Accepted Answer

A) Liquidity risk. 
B) Interest rate risk. 
C) Credit risk. 
D) Foreign exchange rate risk. 
E) Off-balance sheet risk. 
A) Liquidity risk. 
B) Interest rate risk. 
C) Credit risk. 
D) Foreign exchange rate risk. 
E) Off-balance sheet risk.

Question 5

Economies of scale refer to an FI's ability to

Accepted Answer

A) lower its average costs of operations by expanding its output of financial services. 
B) generate cost synergies by producing more than one output with the same inputs. 
C) understand each risk and its interaction with other risks. 
D) finance its assets completely with borrowed funds. 
E) moderate the long-tailed downside risk of the return distribution. 
A) lower its average costs of operations by expanding its output of financial services. 
B) generate cost synergies by producing more than one output with the same inputs. 
C) understand each risk and its interaction with other risks. 
D) finance its assets completely with borrowed funds. 
E) moderate the long-tailed downside risk of the return distribution.

Question 6

Off-balance-sheet activities often affect the shape of a FIs current balance sheet through the creation of contingent claims.

Accepted Answer

A) True 
 B)False

Question 7

An FI can hold assets denominated in a foreign country, but it cannot issue foreign liabilities.

Accepted Answer

A) True 
 B)False

Question 8

Millon National Bank has 10 million British pounds (£) in one-year assets and £8 million in one-year liabilities.In addition, it has one-year liabilities of 4 million euros (€).Assets are earning 8 percent and both liabilities are being paid at a rate of 8 percent.All interest and principal will be paid at the end of the year.What is the net interest income in dollars if the spot prices at the end of the year are $1.35/£ and €1.35/$ and the liabilities instead cost 7 percent instead of 8 percent?

Accepted Answer

A) $1,080,000. 
B) $116,592.59. 
C) $100,567.45. 
D) $112,677.94. 
E) $120,009.76. 
A) $1,080,000. 
B) $116,592.59. 
C) $100,567.45. 
D) $112,677.94. 
E) $120,009.76.

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

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?

Accepted Answer

A) Credit risk and liquidity risk 
B) Operational risk and technology risk 
C) Credit risk and market risk 
D) Technology risk and liquidity risk 
E) Sovereign risk and credit risk 
A) Credit risk and liquidity risk 
B) Operational risk and technology risk 
C) Credit risk and market risk 
D) Technology risk and liquidity risk 
E) Sovereign risk and credit risk

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

FI regulators are not concerned with insolvency risk.

Accepted Answer

A) True 
 B)False

Question 13

FIs that actively trade assets and liabilities are exposed to market risk.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) increasing the duration of assets and increasing the duration of equity. 
B) issuing more equity and reducing the amount of borrowed funds. 
C) not exactly matching the maturities of assets and liabilities. 
D) issuing more equity and investing the funds in higher-yielding assets. 
E) efficient hedging cannot be achieved without the use of derivative securities. 
A) increasing the duration of assets and increasing the duration of equity. 
B) issuing more equity and reducing the amount of borrowed funds. 
C) not exactly matching the maturities of assets and liabilities. 
D) issuing more equity and investing the funds in higher-yielding assets. 
E) efficient hedging cannot be achieved without the use of derivative securities.

Question 15

The timing of when a contingent claim appears on the balance sheet is up to the FI.

Accepted Answer

A) True 
 B)False

Question 16

Interest rate risk management for financial intermediaries deals primarily with

Accepted Answer

A) controlling the overall size of the institution. 
B) controlling the scope of the institution's activities. 
C) limiting the geographic spread of the institution's offices. 
D) limiting the mismatches on the institution's balance sheet. 
E) continuously and carefully complying with all government regulations. 
A) controlling the overall size of the institution. 
B) controlling the scope of the institution's activities. 
C) limiting the geographic spread of the institution's offices. 
D) limiting the mismatches on the institution's balance sheet. 
E) continuously and carefully complying with all government regulations.

Question 17

Effective use of diversification principles allows an FI to reduce the total default risk in a portfolio.

Accepted Answer

A) True 
 B)False

Question 18

The risk that a German investor who purchases British bonds will lose money when trying to convert bond interest payments made in pounds sterling into euros is called

Accepted Answer

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

Question 19

If the loans in the bank's portfolio are all negatively correlated, what will be the impact on the bank's credit risk exposure?

Accepted Answer

A) The loans' negative correlations will decrease the bank's credit risk exposure because lower than expected returns on some loans will be offset by higher than expected returns on other loans. 
B) The loans' negative correlations will increase the bank's credit risk exposure because lower than expected returns on some loans will be offset by higher than expected returns on other loans. 
C) The loans' negative correlations will increase the bank's credit risk exposure because higher returns on less risky loans will be offset by lower returns on riskier loans. 
D) The loans' negative correlations will decrease the bank's credit risk exposure because higher returns on less risky loans will be offset by lower returns on riskier loans. 
E) There is no impact on the bank's credit risk exposure. 
A) The loans' negative correlations will decrease the bank's credit risk exposure because lower than expected returns on some loans will be offset by higher than expected returns on other loans. 
B) The loans' negative correlations will increase the bank's credit risk exposure because lower than expected returns on some loans will be offset by higher than expected returns on other loans. 
C) The loans' negative correlations will increase the bank's credit risk exposure because higher returns on less risky loans will be offset by lower returns on riskier loans. 
D) The loans' negative correlations will decrease the bank's credit risk exposure because higher returns on less risky loans will be offset by lower returns on riskier loans. 
E) There is no impact on the bank's credit risk exposure.

Question 20

FinTech firms are facing increased regulatory oversight.A risk event at a FinTech firm can result in losses that are substantially more damaging than at traditional financial institutions.

Accepted Answer

A) True 
 B)False

Exam 7: Risks of Financial Institutions

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

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

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?

What type of risk focuses upon mismatched currency positions?

Economies of scale refer to an FI's ability to

Off-balance-sheet activities often affect the shape of a FIs current balance sheet through the creation of contingent claims.

An FI can hold assets denominated in a foreign country, but it cannot issue foreign liabilities.

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.

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?

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

FI regulators are not concerned with insolvency risk.

FIs that actively trade assets and liabilities are exposed to market risk.

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

The timing of when a contingent claim appears on the balance sheet is up to the FI.

Interest rate risk management for financial intermediaries deals primarily with

Effective use of diversification principles allows an FI to reduce the total default risk in a portfolio.

The risk that a German investor who purchases British bonds will lose money when trying to convert bond interest payments made in pounds sterling into euros is called

If the loans in the bank's portfolio are all negatively correlated, what will be the impact on the bank's credit risk exposure?

FinTech firms are facing increased regulatory oversight.A risk event at a FinTech firm can result in losses that are substantially more damaging than at traditional financial institutions.

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

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