Exam 7: Risks of Financial Institutions

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

The increased opportunity for a bank to securitize loans into liquid and tradable assets is likely to affect which type of risk?

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

The merger of Citicorp with Travelers Insurance is an example of an attempt to exploit economies of scope.

Historically credit card loans have had very low rates of default or credit risk when compared to other assets that an FI may hold.

Foreign exchange risk is that the value of assets and liabilities may change because of changes in the foreign exchange rate between two countries.

Diversification in the loan portfolio of an FI is intended to reduce systematic risk of each of the loans in the portfolio.

The risk that could disrupt business of financial services firms in the form of lost customers and lost revenue.

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

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 $1.50/£ and €1.65/$?

Direct foreign investment and foreign portfolio investment both can be beneficial to an FI because of imperfectly correlated returns with domestic investments.

The asset transformation function potentially exposes the FI to

To be immunized against foreign currency and foreign interest rate risk, an FI should match both the size and maturities of its foreign assets and foreign liabilities.

Sovereign risk can be effectively controlled through the foreign exchange market.

The potential exercise of unanticipated contingencies can result in

Regulation limits FI investment in non-investment grade bonds (rated below Baa or non-rated).What kind of risk is this designed to limit?

The more volatile asset prices, the more market risks an FI has when they have an open, or unhedged, position.

Insolvency risk is a consequence of the other risks to which FI is exposed.

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.

Bank of the Atlantic has liabilities of $4 million with an average maturity of two years paying interest rates of 4.0 percent annually.It has assets of $5 million with an average maturity of 5 years earning interest rates of 6.0 percent annually.What is the bank's net interest income in dollars in year 3, after it refinances all of its liabilities at a rate of 6.0 percent?