Describe the risk exposure(s) in the following financial transactions. Identify
ID: 2652819 • Letter: D
Question
Describe the risk exposure(s) in the following financial transactions. Identify which transactions are influenced by interest rates or interest income. (CAUTION: Some can be influenced by both!)
Risk Types: Interest rate risk, Credit risk, Technology risk, Foreign exchange rate risk, Country or sovereign risk
Financial Transactions
Risk Type
Describe and justify risk type
Interest Rate or Interest Income?
A bank finances a $10 million, six-year fixed-rate commercial loan by selling one-year certificate of deposit.
An insurance company invests its policy premiums in a long-term municipal bond portfolio.
A French bank sells two-year fixed-rate notes to finance a two-year fixed-rate loan to a British entrepreneur.
A Japanese bank acquires an Austrian bank to facilitate clearing operations.
A bond dealer uses his own equity to buy Mexican debt on the less developed country (LDC) bond market.
A securities firm sells a package of mortgage loans as mortgage-backed securities.
Describe the features of the method you would choose to measure the interest risks identified.
Financial Transactions
Risk Type
Describe and justify risk type
Interest Rate or Interest Income?
A bank finances a $10 million, six-year fixed-rate commercial loan by selling one-year certificate of deposit.
An insurance company invests its policy premiums in a long-term municipal bond portfolio.
A French bank sells two-year fixed-rate notes to finance a two-year fixed-rate loan to a British entrepreneur.
A Japanese bank acquires an Austrian bank to facilitate clearing operations.
A bond dealer uses his own equity to buy Mexican debt on the less developed country (LDC) bond market.
A securities firm sells a package of mortgage loans as mortgage-backed securities.
Describe the features of the method you would choose to measure the interest risks identified.
Explanation / Answer
Financial Transactions
Risk Type
Describe and justify risk type
Interest Rate or Interest Income?
A bank finances a $10 million, six-year fixed-rate commercial loan by selling one-year certificate of deposit.
Credit risk
It is a risk that the bank will not get back its money given to finance the project and interest thereon.
Interest income
An insurance company invests its policy premiums in a long-term municipal bond portfolio.
Interest rate risk
the biggest risk assocoated with the bond is falling interest rate risk
Interest rate
A French bank sells two-year fixed-rate notes to finance a two-year fixed-rate loan to a British entrepreneur.
Country risk, Interest rate risk, Exchange risk, Credit risk
Credit risk inherent to bank for any transaction. two countries involved thus country risk and interest rate risk. two countries means two currency involved thus exchange risk
Interest rate, interest income
A Japanese bank acquires an Austrian bank to facilitate clearing operations.
Exchange risk, Technology risk
Two countries involved thus exchange risk and the transaction is done to carry on technical support thus technology risk
Interest income
A bond dealer uses his own equity to buy Mexican debt on the less developed country (LDC) bond market.
Exchange risk, interest rate risk, country risk
two country involves thus exchange risk and country risk. Involves debt thus interest rate risk
Interest rate, interest income
A securities firm sells a package of mortgage loans as mortgage-backed securities.
Interest rate risk
risk of increasing interest rates
Financial Transactions
Risk Type
Describe and justify risk type
Interest Rate or Interest Income?
A bank finances a $10 million, six-year fixed-rate commercial loan by selling one-year certificate of deposit.
Credit risk
It is a risk that the bank will not get back its money given to finance the project and interest thereon.
Interest income
An insurance company invests its policy premiums in a long-term municipal bond portfolio.
Interest rate risk
the biggest risk assocoated with the bond is falling interest rate risk
Interest rate
A French bank sells two-year fixed-rate notes to finance a two-year fixed-rate loan to a British entrepreneur.
Country risk, Interest rate risk, Exchange risk, Credit risk
Credit risk inherent to bank for any transaction. two countries involved thus country risk and interest rate risk. two countries means two currency involved thus exchange risk
Interest rate, interest income
A Japanese bank acquires an Austrian bank to facilitate clearing operations.
Exchange risk, Technology risk
Two countries involved thus exchange risk and the transaction is done to carry on technical support thus technology risk
Interest income
A bond dealer uses his own equity to buy Mexican debt on the less developed country (LDC) bond market.
Exchange risk, interest rate risk, country risk
two country involves thus exchange risk and country risk. Involves debt thus interest rate risk
Interest rate, interest income
A securities firm sells a package of mortgage loans as mortgage-backed securities.
Interest rate risk
risk of increasing interest rates
interest rateRelated Questions
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