Exam 7: Risks of Financial Institutions

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

In which of the following situations would an FI be considered net long in foreign assets if it has ¥100 million in loans?

An off-balance-sheet activity does not appear on the current balance sheet because it does not involve holding a current primary claim or the issuance of a current secondary claim.

Which term refers to the risk that interest income will decrease as maturing assets are replaced with new, more current assets?

Foreign exchange risk includes interest rate risk and credit risk as well as changes in the foreign exchange rate between two countries.

An FI that finances long-term fixed rate mortgages with short-term deposits is exposed to

General macroeconomic risks may affect all risks of a financial institution.

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?

Economically speaking, OBS activities are contractual claims that

Sovereign risk involves the inability of a foreign corporation to repay the principal or interest on a loan because of stipulations by the foreign government that are out of the control of the foreign corporation.

The potential exercise of unanticipated contingencies can result in

For an FI investing in risky loans or bonds, the probability is relatively the lowest for which of the following occurrences?

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

Contingent claims are assets and liabilities that will come into existence at a future time often at the insistence of a customer or second party.

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

Which of the following refers to an FI's ability to generate cost synergies by producing more than one output with the same inputs?

Systematic credit risk can be reduced significantly by diversification.

This risk of default is associated with general economy-wide or macro conditions affecting all borrowers.

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. To what risk is the bank exposed?

Individuals have an advantage over FIs in that individuals more easily can diversify away some of the credit risk of their asset portfolios.