Questions from Financial Markets

Q: How can interest rate risk adversely affect the economic or market value

How can interest rate risk adversely affect the economic or market value of an FI?

Q: How does a policy of matching the maturities of assets and liabilities

How does a policy of matching the maturities of assets and liabilities work (a) to minimize interest rate risk and (b) against the asset-transformation function for FIs?

Q: Consider two bonds, a 10-year premium bond with a

Consider two bonds, a 10-year premium bond with a coupon rate higher than its required rate of return and a zero coupon bond that pays only a lump sum payment after 10 years with no interest over its...

Q: Consider again the two bonds in Question 13. If the investment

Consider again the two bonds in Question 13. If the investment goal is to leave the assets untouched until maturity, such as for a child’s education or for one’s retirement, which of the two bonds has...

Q: What is the nature of an off-balance-sheet activity

What is the nature of an off-balance-sheet activity? How does an FI benefit from such activities? Identify the various risks that these activities generate for an FI and explain how these risks can cr...

Q: What is foreign exchange risk? What does it mean for an

What is foreign exchange risk? What does it mean for an FI to be net long in foreign assets? What does it mean for an FI to be net short in foreign assets? In each case, what must happen to the foreig...

Q: What two factors provide potential benefits to FIs that expand their asset

What two factors provide potential benefits to FIs that expand their asset holdings and liability funding sources beyond their domestic borders?

Q: If the Swiss franc is expected to depreciate in the near future

If the Swiss franc is expected to depreciate in the near future, would a U.S.-based FI in Bern City, Switzerland, prefer to be net long or net short in its asset positions? Discuss.

Q: What is the difference between firm-specific credit risk and systemic

What is the difference between firm-specific credit risk and systemic credit risk? How can an FI alleviate firm-specific credit risk?

Q: If an FI has the same amount of foreign assets and foreign

If an FI has the same amount of foreign assets and foreign liabilities in the same currency, has that FI necessarily reduced the risk involved in these international transactions to zero? Explain.