Finc 435 exam 4 (final) || Questions and 100% Accurate Answers.
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Course
Finc 435
Institution
Finc 435
types of risk correct answers credit
liquidity
interest rate
market
foreign exchange
sovereign
technology/ operational
off balance sheet
insolvency
foreign exchange risk correct answers exchange rate changes can affect the value of an FIs assets and liabilities denominated in foreign...
Finc 435 exam 4 (final) || Questions and 100% Accurate
Answers.
types of risk correct answers credit
liquidity
interest rate
market
foreign exchange
sovereign
technology/ operational
off balance sheet
insolvency
foreign exchange risk correct answers exchange rate changes can affect the value of an FIs assets
and liabilities denominated in foreign currencies
sovereign risk correct answers repayments from foreign borrowers may be interrupted bc of
interference from foreign govs.
technology/ operational risk correct answers incurred by an FI when its tech. investments don't
produce cost savings
insolvency risk correct answers FIs may not have enough capital to offset a sudden decline in the
value of its assets relative to its liabilities
credit risk correct answers promised cash flows from loans and securities held by FIs may not be
paid in full
Biggest risk for FI
firm specific
systematic
firm specific risk correct answers risk of default for borrowing firm associated with the specific
type of project risk taken from that firm
Diversification reduces firm risk
Machine brakes down, causes comp. not to repay loan
systematic risk correct answers risk of default associated with general economy wide or macro
conditions affecting all borrowers
Diversification does NOT reduce systematic risk
, recession, economy wide, general lack of repayment for lots of firms
liquidity risk correct answers sudden and unexpected increase in liability withdrawals may
require an FI to liquidate assets in a very short period and at low prices
Come from asset side/ demand side of balance sheet
asset side
demand side
asset side of liquidity risk correct answers loan requests and the exercise by borrowers of their
loam commitments and other credit lines causes liquidity risk
Most liquid assets-> cash
demand side of liquidity risk correct answers FIs must either liquidate assets or borrow funds
When FIs face abnormally large cash demands, the cost of purchased of borrowed funds rises
and the supply of funds become restricted
Sell some of less liquid assets to meet the withdrawal demand
interest rate risk correct answers incurred by an FI when the maturities of its assets and liabilities
are mismatched and interest rates are volatile
All FIs deal with this risk, imbalance between asset and liabilities
refinancing risk
reinvestment risk
refinancing risk correct answers (RSA<RSL)
cost of rolling over or reborrowing funds will rise above the returns being earns on asset
investments
Occurs when FIs hold longer term assets relative to liabilities
reinvestment risk correct answers (RSA>RSL)
returns on funds to be reinvested will fall below the cost of funds
Holding shorter term assets relative to its liabilities
market risk correct answers incurred in trading assets and liabilities due to changes in interest
rates, exchange rates, asset prices
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