17 Questions
What is the primary concern associated with credit rating risk exposure in an interest rate swap?
Changes to the credit rating of either counterparty
What is the purpose of standardized documentation templates provided by organizations such as ISDA?
To provide a framework for legally enforcing interest rate swap contracts
What is one of the limitations of interest rate swaps that has been addressed through the use of portfolio compression?
Lack of standard documentation
What is the typical duration of an interest rate swap?
10 years or more
What is the main advantage of using an interest rate swap?
To hedge against interest rate fluctuations
Which assets are classified as risk sensitive assets?
Commercial loans, home mortgages, and investments in securities
What is the task of the treasurer of the Bank of Utopia?
To identify all the risk sensitive assets and liabilities with maturities less than or equal to one year
What type of assets are not classified as risk sensitive assets?
Fixed assets
What is the expected change in interest rates according to the management of Bank of Utopia?
A 0.5% decrease
What percentage of fixed rate home mortgages is expected to be pre-closed if the interest rate falls by 0.5%?
25%
What is the total value of risk sensitive assets considering pre-closure of home mortgages?
675 million
Why are floating rate home mortgages classified as risk sensitive assets?
Because they are affected by changes in interest rates
What percentage of demand deposits are considered rate sensitive based on past data?
20%
What is the impact of a change in interest rates on the bank's profits?
It affects the bank's profits through the Net Interest Income (NII)
How much is the expected reduction in interest expense due to a 0.5% decrease in interest rate?
2.75 million
What is the impact on the bank's interest income if the interest rate reduces by 0.5%?
3.375 million
Why are demand deposits considered partially rate sensitive?
Because interest rates can be changed at any time
This quiz covers the risks and challenges associated with interest rate swaps, including credit rating risk exposure and lack of standard documentation. It's essential to understand these factors to navigate complex financial transactions. Test your knowledge here!
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