FINANCIAL INTERMEDIATION: WHICH ARE THE CORRECT ANSWERS?

1) Off-balance sheet (OBS) commitments are an important source of credit risk for banks. Consequently, OBS commitments are incorporated into Basel RWA with equal weight as on-balance sheet commitments.

a) True b) False

2) A higher (than peers) value of which of the following ratios would indicate that

a bank had more exposure to liquidity risk (than peers)? a) Liquid assets minus volatile liabilities, divided by total assets. b) Liquid assets to total assets. c) Loans to core deposits. d) Tier 1 capital to risk weighted assets.

3) A bank has decided to hedge its exposure as measured by a negative WATM

Gap. Which of the following is NOT appropriate for hedging this position?

a) Sell interest rate futures contracts.

b) Buy put options on a bond.

c) Reduce RSA and/or increase RSL.

d) Buy call options on a bond.

4) Which of the following is NOT a reason for participating in loan syndication?

a) Diversifying loan portfolio.

b) Meet regulatory credit exposure limits requirements.

c) Reducing exposure to small loans to middle market companies

d) Maintain customer relationships while reducing credit exposure.

10. A credit default swap can enable a bank to hedge credit risk on a reference obligation for a named-company by

a) Decreasing in price when the named-company has a credit downgrade.

b) Pay the bank a fixed premium, regardless of the state of the economy.

c) Paying the bank the loss in market value (relative to par) of the reference

obligation, in event of default.

d) Paying the bank a fixed return in exchange for the total return on the

reference obligation.