Exam 16: Off-Balance-Sheet Risk

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?

Commercial letters of credit are guarantees that are issued to cover contingencies that are potentially more severe and less predictable than those covered by standby letters of credit.

What are commercial letters of credit?

The amount of regulations that have been proposed because of the increased use of risk-reducing OBS derivatives is increasing.

An FI has assets of $800 million and liabilities of $740 million. What is the balance sheet capital?

Loans sold without recourse have contingent liability off-balance-sheet implications for the FI that sells the loan.

The Clearing House Interbank Payments System (CHIPS) is an international wire transfer system owned by the participating banks in the countries in which it is used.

The effect to an FI of default by the counterparty to a derivative contract is LEAST serious with

If a future credit crunch is possible, a loan commitment may expose the FI to

Where are the contingent items disclosed in the financial statements?

Credit derivatives allow FIs to hedge credit risk on individual assets, but not on portfolios of assets.

Off-balance sheet activities can have both positive and negative effects on the risk of the FI.

Which of the following situations is similar to the externality effect?

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

Which of the following are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a pre-specified price for a specified time period?

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

FIs are competing directly with loan commitments, one of their own OBS products, when they also offer:

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.

A corporation is planning to issue $10 million worth of 180-day commercial paper. In order to reduce the interest rates by 25 basis points (per year), it plans to back this issue with a standby letter of credit or a loan commitment. The standby letter of credit is available for 20 basis points (per year) to be paid up-front. The loan commitment for $10 million is available for an up-front fee of 15 basis points (per year) and a 5 basis points back-end fee. What are the savings to the corporation if it obtains a standby letter of credit to back its $10 million issue of commercial paper?

When-issued trading involves the commitment to buy and sell securities before they are issued.