Which of the following are correct about off-balance sheet activities?
A)They provide a key source of interest income for many FIs.
B)By hedging against on-balance-sheet interest rate, FX and credit risks, OBS derivative instruments actually reduce FI overall insolvency risk.
C)Higher regulatory costs on derivative instruments may cause FIs to over-hedge resulting in a decrease in FI insolvency risk.
D)All of the listed options are correct.

Question

Quizplus · Accepted Answer

Off-balance sheet (OBS) activities refer to any financial transaction that does not appear on an FI's balance sheet. OBS activities such as derivative instruments provide a key source of interest income for many FIs. By hedging against on-balance-sheet interest rate, FX and credit risks, OBS derivative instruments actually reduce FI overall insolvency risk. Higher regulatory costs on derivative instruments may cause FIs to over-hedge resulting in a decrease in FI insolvency risk. However, option A is incorrect as OBS activities include a wide range of transactions, not just interest income. Option D is incorrect as option C is not correct.

Which of the Following Are Correct About Off-Balance Sheet Activities