Question 1

Which one of the following is a source of liquidity risk for a bank?

Accepted Answer

A natural disaster in the bank's community can lead to unexpected withdrawals and disruptions, posing a liquidity risk.

Question 2

The number of futures contracts that a bank will need in order to fully hedge the bank's overall interest rate risk exposure and protect the bank's net worth depends upon (among other factors):

Accepted Answer

The number of futures contracts needed to hedge interest rate risk depends on the relative duration of assets and liabilities, the duration of the underlying security in the futures contract, and the price of the futures contract. All these factors influence the effectiveness of the hedge.

Question 3

If the coefficient of correlation between USD/TWD and USD/JPN is 0.25. Please calculate the DEAR for this 2-million USD portfolio.

Accepted Answer

The answer of If the coefficient of correlation between USD/TWD...

Question 4

In 2008, many banks encounter liquidity issues and experienced deposit withdrawal or bank run. Which one of the following alternatives is an appropriate way to deal with deposit withdrawal?

Accepted Answer

The answer of In 2008, many banks encounter liquidity issues...

Question 5

ABC Bank has $39 million invested in T-Bonds with a 16-year duration, $39 million in 6 month maturity T-Bills, and $75 million invested in consumer loans with a 3 year duration. If they are all portfolios of this bank, what is the duration of the bank's asset portfolio in years?

Accepted Answer

The answer of ABC Bank has $39 million invested in...

Question 6

What is Formosa International Bank's total net liquidity?

Accepted Answer

The answer of What is Formosa International Bank's total net...

Question 7

Bank A has a loan to deposit ratio of 75%, core deposits equal 62% of total assets and borrowed funds are 5% of assets. Bank B has a loan to deposit ratio of 120%. Core deposits are 55% of assets and borrowed funds are 20% of assets. Which bank has more liquidity risk? Ceteris paribus, which bank will probably be more profitable when interest rates are low?

Accepted Answer

Bank B has more liquidity risk due to its higher loan to deposit ratio and higher reliance on borrowed funds. Bank B is likely more profitable when interest rates are low because it has a higher loan to deposit ratio, meaning it earns more from loans relative to its deposits.

Question 8

The bank's one-year gap between assets and liabilities is (Mill $)

Accepted Answer

The answer of The bank's one-year gap between assets and...

Question 9

Which one of the following situations creates the most liquidity risk?

Accepted Answer

Long term assets funded by short term liabilities create the most liquidity risk because the assets cannot be quickly converted into cash to meet the short-term obligations. This mismatch in the maturity profiles of assets and liabilities can lead to a liquidity shortfall.

Question 10

Please calculate the 10-day Value-at-Risk (VaR) for this 2-million USD portfolio.

Accepted Answer

The correct answer is A because the 10-day VaR for this 2-million USD portfolio is $ 99,864.02. This is calculated by taking the 90th percentile of the portfolio's daily returns over the past 10 days.

Question 11

A bond has a face value of $1,000 and five years to maturity. This bond has a coupon rate of 13 percent and is selling in the market today for $902. Coupon payments are made annually on this bond. What is the yield to maturity (YTM) for this bond?

Accepted Answer

The yield to maturity (YTM) is the interest rate that equates the present value of the bond's future cash flows (coupon payments and face value at maturity) to its current market price. Given the bond's coupon rate, face value, market price, and time to maturity, the YTM is calculated to be approximately 16.00%.

Question 12

Which of the following results in a net liquidity drain?

Accepted Answer

The answer of Which of the following results in a...

Question 13

What is Formosa International Bank's total uses of liquidity?

Accepted Answer

The answer of What is Formosa International Bank's total uses...

Question 14

What is Formosa International Bank's total sources of liquidity?

Accepted Answer

The answer of What is Formosa International Bank's total sources...

Question 15

A bank has Federal funds totaling $25 million with an interest rate sensitivity weight of 1.0. This bank also has loans of $105 million and investments of $65 million with interest rate sensitivity weights of 1.40 and 1.15 respectively. This bank also has $135 million in interest-bearing deposits with an interest rate sensitivity weight of 0.90 and other money market borrowings of $75 million with an interest rate sensitivity weight of 1.0. What is the weighted interest-sensitive gap for this bank?

Accepted Answer

The weighted interest-sensitive gap is calculated as follows:(Interest rate sensitivity weight of Federal funds * Federal funds) + (Interest rate sensitivity weight of loans * Loans) + (Interest rate sensitivity weight of investments * Investments) - (Interest rate sensitivity weight of interest-bearing deposits * Interest-bearing deposits) - (Interest rate sensitivity weight of other money market borrowings * Other money market borrowings)= (1.0 * $25 million) + (1.40 * $105 million) + (1.15 * $65 million) - (0.90 * $135 million) - (1.0 * $75 million)= $25 million + $147 million + $74.75 million - $121.5 million - $75 million= $50.25 million

Question 16

Please calculate the DEARs for TWD and JPN in USD.

Accepted Answer

The answer of Please calculate the DEARs for TWD and...

Question 17

If all interest rates on the two sides of balance sheet decline by 65 basis points, when other things are equal, what is the change in net interest income for Formosa Independence Bank over the year?

Accepted Answer

The answer of If all interest rates on the two...

Question 18

Microhedging is to use risk-management instruments such as futures and options to reduce the interest rate risk of banks.

Accepted Answer

The answer of Microhedging is to use risk-management instruments such...

Question 19

The gain or loss to a bank from the use of a financial futures contract depends upon:

Accepted Answer

The gain or loss from a financial futures contract is influenced by the duration of the underlying security, the initial futures price, and the expected change in interest rates. All these factors collectively determine the financial outcome for the bank.

Question 20

A bank has a positive gap and estimates that the spread between risk-sensitive assets and risk-sensitive liabilities will move directly with interest rates. If interest rates fall the bank's overall NII will

Accepted Answer

A positive gap means that the bank has more rate-sensitive assets than liabilities. If interest rates fall, the income from these assets will decrease more than the decrease in expenses from liabilities, leading to a fall in Net Interest Income (NII).

Quiz 20: Risk Management in Financial Institutions