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business
principles of risk management

Questions and Answers of Principles Of Risk Management

A bank has the following balance sheet: Assets Avg. Rate Avg. Rate Rate sensitive $225,000 6.35% Fixed rate 550,000 7.55 Nonearning Total 120,000 Liabilities/Equity Rate sensitive Fixed rate
The balance sheet of A. G. Fredwards, a government security dealer, is listed below. Market yields are in parentheses, and amounts are in millions. Assets Liabilities and Equity Cash $ 20 Overnight
A bank has the following balance sheet: Assets Avg. Rate Liabilities/Equity Rate sensitive $ 550,000 7.75% Rate sensitive $ 575,000 Fixed rate 755,000 8.75 Fixed rate 605,000 Nonearning 265,000
A bank has the following balance sheet:Assets Avg. Rate Liabilities/Equity Avg. Rate Rate sensitive $ 550,000 7.75% Rate sensitive $ 375,000 6.25%Fixed rate 755,000 8.75 Fixed rate 805,000 7.50
Use the following information about a hypothetical government security dealer named M. P. Jorgan. Market yields are in parentheses, and amounts are in millions.Assets Liabilities and Equity Cash $ 10
Consider the following balance sheet for WatchoverU Savings, Inc. (in millions):Assets Liabilities and Equity Floating-rate mortgages (currently 10% annually) $ 50 1-year time deposits (currently 6%
A bank manager is quite certain that interest rates are going to fall within the next six months. How should the bank manager adjust the bank's six-month repricing gap and spread to take advantage of
What is the spread effect?LO.1
Which of the following assets or liabilities fit the one-year rate or repricing sensitivity test? 3-month U.S. Treasury bills 1-year U.S. Treasury notes 20-year U.S. Treasury bonds 20-year
What is the gap ratio? What is the value of this ratio to interest rate risk man- agers and regulators?LO.1
What are the reasons for not including demand deposits as rate-sensitive liabili- ties in the repricing analysis for a commercial bank? What is the subtle but poten- tially strong reason for
Consider the following balance sheet positions for a financial institution: Rate-sensitive assets = $200 million Rate-sensitive liabilities = $100 million Rate-sensitive assets $100 million
If a bank manager was quite certain that interest rates were going to rise within the next six months, how should the bank manager adjust the bank's six-month repricing gap to take advantage of this
Which of the following is an appropriate change to make on a bank's balance sheet when GAP is negative, spread is expected to remain unchanged, and interest rates are expected to rise?a. Replace
What is the CGAP effect? According to the CGAP effect, what is the relation between changes in interest rates and changes in net interest income when CGAP is positive? When CGAP is negative?LO.1
What is a maturity bucket in the repricing model? Why is the length of time selected for repricing assets and liabilities important in using the repricing model?LO.1
What is the repricing gap? In using this model to evaluate interest rate risk, what is meant by rate sensitivity? On what financial performance variable does the repricing model focus? Explain.LO.1
How has the increased level of financial market integration affected interest rates?LO.1
How do monetary policy actions made by the Federal Reserve impact interest rates?LO.1
Discuss the interrelationships among the different sources of FI risk exposure. Why would the construction of an FI risk management model to measure and manage only one type of risk be incomplete?LO.1
Why can insolvency risk be classified as a consequence or outcome of any or all of the other types of risks?LO.1
What is liquidity risk? What routine operating factors allow Fls to deal with this risk in times of normal economic activity? What market reality can create severe financial difficulty for an FI in
Consider these four types of risks: credit, foreign exchange, market, and sov- ereign. These risks can be separated into two pairs of risk types in which each pair consists of two related risk types,
Characterize the risk exposure(s) of the following FI transactions by choosing one or more of the risk types listed below:a. Interest rate riskb. Credit riskc. Off-balance-sheet riskd. Technology
What is the difference between technology risk and operational risk? How does internationalizing the payments system among banks increase operational risk?LO.1
What is technology risk? What is the difference between economies of scale and economies of scope? How can these economies create benefits for an FI? How can these economies prove harmful to an
What is country or sovereign risk? What remedy does an FI realistically have in the event of a collapsing country or currency?LO.1
Suppose you purchase a 10-year, AAA-rated Swiss bond for par that is paying an annual coupon of 6 percent. The bond has a face value of 1,000 Swiss francs (SF). The spot rate at the time of purchase
Six months ago, Qualitybank issued a $100 million, one-year maturity CD denominated in euros. On the same date, $60 million was invested in a -denominated loan and $40 million was invested in a U.S.
Assume that a bank has assets located in London that are worth 150 million on which it earns an average of 8 percent per year. The bank has 100 million in liabilities on which it pays an average of 6
A U.S. insurance company invests $1,000,000 in a private placement of Brit- ish bonds. Each bond pays 300 in interest per year for 20 years. If the cur- rent exchange rate is 1.7612/$, what is the
If an FI has the same amount of foreign assets and foreign liabilities in the same currency, has that FI necessarily reduced the risk involved in these inter- national transactions to zero?
If international capital markets are well integrated and operate efficiently, will FIs be exposed to foreign exchange risk? What are the sources of foreign exchange risk for Fls?LO.1
If the Swiss franc is expected to depreciate in the near future, would a U.S.-based FI in Bern City prefer to be net long or net short in its asset positions? Discuss.LO.1
What is foreign exchange risk? What does it mean for an FI to be net long in foreign assets? What does it mean for an FI to be net short in foreign assets? In each case, what must happen to the
What two factors provide potential benefits to Fls that expand their asset hold- ings and liability funding sources beyond their domestic borders?LO.1
What is the nature of an off-balance-sheet activity? How does an FI benefit from such activities? Identify the various risks that these activities generate for an FI, and explain how these risks can
Many banks and savings institutions that failed in the 1980s had made loans to oil companies in Louisiana, Texas, and Oklahoma. When oil prices fell, these companies, the regional economy, and the
What is the difference between firm-specific credit risk and systematic credit risk? How can an FI alleviate firm-specific credit risk?LO.1
What is credit risk? Which types of Fls are more susceptible to this type of risk? Why?LO.1
What is market risk? How does this risk affect the operating performance of financial institutions? What actions can be taken by an FI's management to minimize the effects of this risk?LO.1
A bank invested $50 million in a two-year asset paying 10 percent interest per year and simultaneously issued a $50 million, one-year liability paying 8 percent interest per year. The liability will
Amoney market mutual fund bought $1 million of two-year Treasury notes six months ago. During this time, the value of the securities has increased, but for tax reasons the mutual fund wants to
Consider again the two bonds in problem 9. If the investment goal is to leave the assets untouched until maturity, such as for a child's education or for one's retirement, which of the two bonds has
Two 10-year bonds are being considered for an investment that may have to be liquidated before the maturity of the bonds. The first bond is a 10-year premium bond with a coupon rate higher than its
Corporate bonds usually pay interest semiannually. If a company decided to change from semiannual to annual interest payments, how would this affect the bond's interest rate risk?LO.1
How does a policy of matching the maturities of assets and liabilities work (a) to minimize interest rate risk and (b) against the asset-transformation function of Fls?LO.1
A financial institution has the following market value balance sheet structure:Cash $ 1,000 Certificate of deposit $10,000 Bond 10,000 Equity 1,000 Total assets $11,000 Total liabilities and equity
How can interest rate risk adversely affect the economic or market value of an FI?LO.1
The sales literature of a mutual fund claims that the fund has no risk exposure since it invests exclusively in federal government securities which are free of default risk. Is this claim true?
What is reinvestment risk? How is reinvestment risk part of interest rate risk? If an FI funds short-term assets with long-term liabilities, what will be the impact on earnings of a decrease in the
What is refinancing risk? How is refinancing risk part of interest rate risk? If an FI funds long-term assets with short-term liabilities, what will be the impact on earnings of an increase in the
What is the process of asset transformation performed by a financial institution? Why does this process often lead to the creation of interest rate risk? What is interest rate risk?LO.1
Go to the Federal Reserve's Web site at www.federalreserve.gov and get the latest information on finance company consumer, real estate, and business lending using the following steps. Click on
Why do finance companies face less regulation than do commercial banks? How does this advantage translate into performance advantages? What is the major performance disadvantage?LO.1
How does the amount of equity as a percentage of total assets compare for finance companies and commercial banks? What accounts for this difference?LO.1
Compare Tables 6-1 and 4-7. Which firms have higher ratios of capital to total assets: finance companies or securities firms? What does this comparison indi- cate about the relative strengths of
How do finance companies make money? What risks does this process entail? How do these risks differ for a finance company versus a commercial bank?LO.1
What have been the primary sources of financing for finance companies?LO.1
What advantages do finance companies have over commercial banks in offer- ing services to small business customers? What are the major subcategories of business loans? Which category is the
Why have home equity loans become popular? What are securitized mortgage assets?LO.1
What are the major types of consumer loans? Why are the rates charged by consumer finance companies typically higher than those charged by commer- cial banks?LO.1
What have been the major changes in the accounts receivable balances of finance companies over the 32-year period 1977-2009?LO.1
What are the three major types of finance companies? To which market seg- ments do each of these types of companies provide service?LO.1
What is the primary function of finance companies? How do finance compa- nies differ from commercial banks?LO.1
Go to the National Credit Union Association Web site at www.ncua.gov to collect the most recent information on number of credit unions, assets of credit unions, and membership in credit unions using
Go to the Federal Reserve Board’s Web site at www.federalreserve.gov and find the most recent balance sheet information for the credit union industry using the following steps. Click on “Economic
Go to the FDIC Web site at www.fdic.gov and find the most recent breakdown of U.S. bank asset concentrations using the following steps. Click on“Analysts.” From there click On “FDIC Quarterly
Compare and contrast the performance of worldwide depository institutions with those of major foreign countries during the financial crisis.LO.1
How does the asset structure of credit unions compare with the asset structure of commercial banks and savings institutions? Refer to Tables 2–5 , 2–9 , and 2–12 to formulate your answer.LO.1
What are the operating advantages of credit unions that have caused concern among commercial bankers? What has been the response of the Credit Union National Association to the banks’ criticism?LO.1
What is the “common bond” membership qualification under which credit unions have been formed and operated? How does this qualification affect the operational objective of a credit union?LO.1
How did the Financial Institutions Reform, Recovery, and Enforcement Act(FIRREA) of 1989 and the Federal Deposit Insurance Corporation Improvement Act of 1991 reverse some of the key features of
How did two pieces of regulatory legislation—the DIDMCA in 1980 and the DIA in 1982—change the operating profitability of savings institutions in the early 1980s? What impact did these pieces of
What happened in 1979 to cause the failure of many savings institutions during the early 1980s? What was the effect of this change on the operating statements of savings institutions?LO.1
How do savings banks differ from savings associations? Differentiate in terms of risk, operating performance, balance sheet structure, and regulatory responsibility.LO.1
How do the asset and liability structures of a savings institution compare with the asset and liability structures of a commercial bank? How do these structural differences affect the risks and
What factors are given credit for the week performance of commercial banks in the late 2000s?LO.1
What factors are given credit for the strong performance of commercial banks in the early and mid-2000s?LO.1
What factors normally are given credit for the revitalization of the banking industry during the 1990s? How is Internet banking expected to provide benefits in the future?LO.1
What are the main features of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994? What major impact on commercial banking activity occured from this legislation?LO.1
For each of the following banking organizations, identify which regulatory agencies (OCC, FRB, FDIC, or state banking commission) may have some reg- ulatory supervision responsibility:a.
Use the data in Table 2-6 to answer the following questions.a. What was the average annual growth rate in OBS total commitments over the period 1992-2009?b. What categories of contingencies have had
What types of activities are normally classified as off-balance-sheet (OBS) activities?a. How does an OBS activity move onto the balance sheet as an asset or liability?b. What are the benefits of OBS
The following balance sheet accounts (in millions of dollars) have been taken from the annual report for a U.S. bank. Arrange the accounts in balance sheet order and determine the value of total
How does the liability maturity structure of a bank's balance sheet compare with the maturity structure of the asset portfolio? What risks are created or intensified by these differences?LO.1
What are the three major segments of deposit funding? How are these seg- ments changing over time? Why? What strategic impact do these changes have on the profitable operation of a bank?LO.1
What are the major sources of funds for commercial banks in the United States? How is the landscape for these funds changing and why?LO.1
What are the major uses of funds for commercial banks in the United States? What are the primary risks to a bank caused by each of these? Which of the risks is most critical to the continuing
What factors have caused the decrease in loan volume relative to other assets on the balance sheets of commercial banks? How has each of these factors been related to the change and development of
Use the data in Table 2-4 for the banks in the two asset size groups (a) $100 million-$1 billion and (b) over $10 billion to answer the following questions.a. Why have the ratios for ROA and ROE
What are the differences between community banks, regional banks, and money center banks? Contrast the business activities, location, and markets of each of these bank groups.LO.1
Describe the nexus between cyber and physical security. What is the importance of it for the current climate of critical infrastructure protection?
Why is information sharing an issue between public and private sector partners? What suggestions do you have to improve upon quality and frequency of information being shared?
How does climate change impact critical infrastructure protection?Cite two examples of how it is changing the way we perceive extreme weather events.
Discuss the key challenges facing critical infrastructure protection in the future. How do these challenges impact the concepts of risk and resilience? What suggestions do you have to address these
What distinguishes nuclear power plant safety from other engineered facilities?
What has been the record for nuclear plant safety?
What major accidents have occurred and how have they influenced nuclear power?
What are the principal elements of managing the safety of nuclear power?

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