Question

1.         To gain the benefit of _______________, a bank makes various types of loans, to various types of borrowers.

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

2.         Argentina unilaterally told its creditors in 2005 that it would henceforth repay only $0.30 for every $1.00 of its debt that was outstanding. Argentina’s creditors had been exposed to ______________ risk, which was then realized.

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

3.         Many banks lost considerable amounts on failing real estate mortgage loans about the time of the Financial Crisis of 2007-08. 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.         All of Hometown Bank’s outstanding loans are fixed interest rates with maturities over two years. Hometown’s deposits all have maturities less than six months, either overnight checking account deposits or six-month CDs. From this fact alone, Hometown is facing:

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

5.         If an unanticipated increase in deposits withdrawals forces a Savings Institution to sell balance sheet assets at “fire sale” prices, the SI was exposed to ____________.

A.     credit risk.
B.     liquidity risk.
C.      interest rate risk.
D.      sovereign risk.
E.      technology risk.

Answer 1

S.No.	Answer	Details and reason of answer.
1	Diversification	By diversification not only banks can manage firm specific risk but also use their money in various manner and mode which assure regular flow of fund and income.
2	Sovereign risk	Risk when a central bank or Government of any country fails to repay its outstanding debt payment.
3	Credit Risk	When borrowers fail to meet its repayment obligation or fails to repay its debt obligation in time, it shows sign of credit risk.
4	Interest Rate risk	In this case bank need to repay its deposits within six months however its loan will be repaid after two years. In these six months bank need to arrange money to pay off its customers deposit which may not be possible with only fixed income from outstanding loan. Due to this bank may need to arrange new deposits with higher rate of interest which can create extra burden but loans are of long terms their rates will remain constant. Further this is creating liquidity risk as well.
5	Liquidity risk	Due to insufficient amount of money bank forced to sale its assets on such discounted price shows that bank is facing liquidity risk.