Question

4. Off balance sheet activities Suppose Simone wants to open a European designer clothes store downtown. She goes to Italy to purchase a collection of clothes, but nobody knows her in Italy. Simone goes to her local bank and asks it to back up her transaction. What kind of support can Simone get from her bank? A swap contract A commercial letter of credit An agreement to exchange currencies or interest payments at an agreed-upon price at some date in the future A standby letter of credit Credit Default Swaps allow Investors to bet on mortgages not being repaid. O True False

Answer 1

• A Commercial letter of credit :- As they acts a a guarantee to the seller in the foreign and creates a trust that their money is safe and is guaranteed by the buyer bank that in case of any non payment or default in payment the bank will pay for it.

• True:- The credit default swap allows to bet on all the credit risk that can arise due to non repayment of the debt or any money borrowed .