Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

The delta of an option is

Accepted Answer

A) a measure of the option's price volatility. 
B) calculated by dividing the price of the underlying security by the change in the option's price. 
C) equal to the option premium. 
D) calculated by multiplying the change in the price of the underlying security by the change in the option's price. 
E) usually negative. 
A) a measure of the option's price volatility. 
B) calculated by dividing the price of the underlying security by the change in the option's price. 
C) equal to the option premium. 
D) calculated by multiplying the change in the price of the underlying security by the change in the option's price. 
E) usually negative.

Question 3

Which of the following statements best describe a derivative contract?

Accepted Answer

A) Contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B) Contingent guarantees sold by an FI to underwrite the performance of the buyer of the guaranty. 
C) Agreement between two parties to exchange a standard quantity of an asset at a predetermined price at a specified date in the future. 
D) Trading in securities prior to their actual issue. 
E) Loans originated by an FI and then sold to other investors with recourse. 
A) Contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B) Contingent guarantees sold by an FI to underwrite the performance of the buyer of the guaranty. 
C) Agreement between two parties to exchange a standard quantity of an asset at a predetermined price at a specified date in the future. 
D) Trading in securities prior to their actual issue. 
E) Loans originated by an FI and then sold to other investors with recourse.

Question 4

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 5

In many ways, SLCs perform similar functions for a borrower as do loan commitments.

Accepted Answer

A) True 
 B)False

Question 6

Loan commitment activities increase the insolvency exposure of FIs that engage in such activities.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

The current market value or contingent claim value of OBS items overestimates their notional value.

Accepted Answer

A) True 
 B)False

Question 9

Contingent credit risk is more serious for futures contracts than forward contracts because the over-the-counter arrangements necessary to replicate the guarantees at a later date.

Accepted Answer

A) True 
 B)False

Question 10

An "material adverse change in conditions" clause is included in loan commitments to protect the FI against

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

The ability to form financial holding companies for the purpose of creating full-service financial institutions has caused an increase in affiliate risk.

Accepted Answer

A) True 
 B)False

Question 12

Derivative products used in managing contingent credit risk can only be acquired as over-the-counter arrangements.

Accepted Answer

A) True 
 B)False

Question 13

Off-balance-sheet items can generate cash flows that immediately impact the bank's financial performance.

Accepted Answer

A) True 
 B)False

Question 14

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 15

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

Accepted Answer

A) True 
 B)False

Question 16

Up-front fees on loan commitments are charged as a certain percentage of

Accepted Answer

A) commitment size. 
B) loan taken down. 
C) utilized portion of commitment size. 
D) unused portion of commitment size. 
E) interest payable on the loan commitment. 
A) commitment size. 
B) loan taken down. 
C) utilized portion of commitment size. 
D) unused portion of commitment size. 
E) interest payable on the loan commitment.

Question 17

Even though an FI has off-balance-sheet activities, the true net worth is equal to on-balance sheet assets minus on-balance sheet liabilities.

Accepted Answer

A) True 
 B)False

Question 18

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.

Question 19

A $200 million loan commitment has an up-front fee of 20 basis points and a back-end fee of 25 basis points on the unused portion. If 25 percent of the commitment is drawn down, the total fees are

Accepted Answer

A) $250,000. 
B) $4,000,000. 
C) $400,000. 
D) $775,000. 
E) $375,000. 
A) $250,000. 
B) $4,000,000. 
C) $400,000. 
D) $775,000. 
E) $375,000.

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

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

The delta of an option is

Which of the following statements best describe a derivative contract?

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

In many ways, SLCs perform similar functions for a borrower as do loan commitments.

Loan commitment activities increase the insolvency exposure of FIs that engage in such activities.

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

The current market value or contingent claim value of OBS items overestimates their notional value.

Contingent credit risk is more serious for futures contracts than forward contracts because the over-the-counter arrangements necessary to replicate the guarantees at a later date.

An "material adverse change in conditions" clause is included in loan commitments to protect the FI against

The ability to form financial holding companies for the purpose of creating full-service financial institutions has caused an increase in affiliate risk.

Derivative products used in managing contingent credit risk can only be acquired as over-the-counter arrangements.

Off-balance-sheet items can generate cash flows that immediately impact the bank's financial performance.

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

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

Up-front fees on loan commitments are charged as a certain percentage of

Even though an FI has off-balance-sheet activities, the true net worth is equal to on-balance sheet assets minus on-balance sheet liabilities.

The quantity risk exposure of a loan commitment is

A $200 million loan commitment has an up-front fee of 20 basis points and a back-end fee of 25 basis points on the unused portion. If 25 percent of the commitment is drawn down, the total fees are

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

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loans

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Technology and Other Operational 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 Index

Filters