Tutorial 2 questions _ BFW 2401 S1_2019.docx

Tutorial 2 questions _ BFW 2401 S1_2019.docx - BFW 2401...

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BFW 2401 Week 02 tutorial questions 1. What is the process of asset transformation performed by a financial institution? Why does this process often lead to the creation of interest rate risk ? What is interest rate risk? ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- 2. What is refinancing risk ? How is refinancing risk part of interest rate risk? If an FI funds long- term fixed-rate assets with short-term liabilities, what will be the impact on earnings of an increase in the rate of interest? A decrease in the rate of interest? ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------- 3. What is the difference between technology risk and operational risk? How does internationalising the payments system among banks increase operational risk? ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- 4. A bank invested $50 million in a two-year asset paying 10 per cent interest per annum and simultaneously issued a $50 million, one-year liability paying 8 per cent interest per annum. What will be the bank's net interest income each year if at the end of the first year all interest rates have increased by 1 per cent (100 basis points)? ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------
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5. What is market risk ? How do the results of this risk surface in the operating performance of financial institutions? What actions can be taken by FI management to minimise the effects of this risk?------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- ------ 6. Why can insolvency risk be classified as a consequence or outcome of any or all of the other types of risks?
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