Question

1.         When a bank tries to make a wide variety of loans, to various kinds of borrowers, it is hoping to reap the benefit of:

A.        guaranteed income
B.         diversification
C.         more firm-specific risk exposure
D.        reduced operational risk
E.         reduced off-balance-sheet risk

2.         In 2005, Argentina offered its creditors 30 cents on the dollar for a sizeable amount of its outstanding debt. The offer was nonnegotiable. Clearly, Argentina’s creditors were exposed to ______________ risk.

A.        sovereign
B.         operational
C.         technology
D.        interest rate
E.         (b) and (c)

3.         In the mid-2000s, many banks lost billions of dollars on failing mortgage loans. The risk of such occurrences would be categorized as:

A.        off-balance-sheet risk
B.         operational risk
C.         credit risk
D.        technology risk
E.         country or sovereign risk

4.         Bank-X’s outstanding loans all have fixed interest rates, with maturities more than two years. The bank’s deposit liabilities all have maturities of no more than six months. Bank-X most obviously is facing:

A.        Credit risk
B.         Insolvency risk
C.         Liquidity risk
D.        Operational risk
E.         Interest rate risk

Answer 1

1. Diversification When a bank tries to provide a variety of loans to various borrower it is hoping to reap the benefits of the diversification as diversification helps in assuring that not all asset cause losses. 2. Sovereign risk When a country defaults on its obligation to pay back its debt, it is known as sovereign default and clearly the creditors were exposed to sovereign risk. 3. Credit risk The default on these securities would be characterized as credit risk. 4. Interest rate risk This would be an example of interest rate risk as banks assets are of fixed interest rate with maturities more than 2 years while liabilities are of no more than six months.