Financial Risk Management: Introduction to Risk Concepts

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Questions and Answers

What does risk in finance refer to?

Only positive outcomes
The probability of an event (correct)
The subset of uncertainty that cannot be quantified
Certain outcomes

Why does interest rate risk arise for banks?

Due to mismatch in asset and liability maturities (correct)
Due to changes in exchange rates
Because of market saturation
Because of credit risk

What is credit risk?

The risk of changes in exchange rates
The risk of stock market fluctuations
The risk of losing interest income
The risk of borrowers' default or credit deterioration (correct)

How is interest rate risk defined for banks?

Declines of net interest income due to interest rate movements (D) Signup and view all the answers

What triggers a total or partial loss of the amount lent to a counterparty?

Default risk (B) Signup and view all the answers

How does business risk arise for banks?

Due to exposure to uncertain market events (C) Signup and view all the answers

What does credit risk refer to?

Deterioration of the borrower's credit standing which does not imply default but involves a higher likelihood of default (D) Signup and view all the answers

How is the economic value of a loan affected when the credit quality of the borrower declines?

The economic value decreases because the book value decreases (D) Signup and view all the answers

What is off-balance-sheet risk related to?

Contingent assets and liabilities activities that do not appear on an FI's balance sheet (C) Signup and view all the answers

What is liquidity risk?

Risk of being unable to raise cash when needed due to sudden liability withdrawals (A) Signup and view all the answers

How can liquidity risk lead to a solvency problem?

By generating runs on the institution (C) Signup and view all the answers

What does foreign exchange risk refer to?

The risk that exchange rate changes can affect the value of FI’s assets and liabilities denominated in foreign currencies (A) Signup and view all the answers

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