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BANKING CHAPT 5&6 > CHAPTER 5 > Flashcards

CHAPTER 5 Flashcards

1
Q

Refers to trades used to reduce risk

A

Hedging

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2
Q

Hedgers include (4)

A

Financial institutions
Commercial producers
Processors
Users of agricultural commodities

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3
Q

Is a financial contract whose value is derived from the performance of underlying market factors, such as interest rates, currency exchange rates, commodity, credit, and equity prices.

A

Derivatives

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4
Q

Can be used to short risk to hedge, to reduce risk, or to speculate

A

Derivatives

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5
Q

Can be a lower-cost way to invest funds that buying for cash

A

Derivatives

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6
Q

Derivatives can be used to reduce risk, but they are not risk-free (True/False)

A

True

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7
Q

Include a wide assortment of financial contracts

A

Derivative Transactions

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8
Q

Are traders who attempt to profit by anticipating the prices of financial instruments and commodities

A

Speculators

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9
Q

Is the nominal or face amount that is used to calculate payments made on swaps and other risk management products

A

Notional Amount

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10
Q

Is used because the principal amounts rarely change hands

A

Notional

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11
Q

Financial institutions and others use derivatives for: (6)

A

Hedging
Reducing overall risk
Speculating
Price discovery
Obtaining better financial terms
Changing the asset mix of their portfolios

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12
Q

Protect the value of their assets or liabilities by using derivative transactions whose values are expected to change in the opposite direction of their assets or liabilities.

A

Hedgers

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13
Q

Use derivatives to take advantage of anticipated price changes in interest rates, mortgages, commodities, and so on.

A

Speculators

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14
Q

Is a significant risk in bank derivatives trading activities

A

Credit risk

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15
Q

Is referref to as counterparty risk that stems from the creditworthiness of banks, broker-dealees, and other financial institutions that gail to deliver on their over-the-counter (OTC) derivative obligations

A

Credit risk

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16
Q

Is a reference amount from which contractual payments will be derived, but it is generally not an amount at risk

A

Notional amount of a derivative contract

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17
Q

Is a function of a number of variables, such as whether coubterparties exchange notionak principal… and the credit worthiness of the counterparty.

A

Credit Risk in a derivative contract

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18
Q

Banks control market risk in trading operations primarily by establishing limits against potentio losses

A

Market Risk

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19
Q

Is a statistical measure that banks use to quantify the mqximum expected loss, over a specified horizon and at a certain confidence level, in normal market

A

Value at Risk (VaR)

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20
Q

Is the difference between the spot or cash price of a commodity and the price of the nearest futures contract for the same or a related commodity (cash minus futures)

A

Basis

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21
Q

Is usually computed in relation to the futures contract next to expure and may reflect different time periods, product forms, grades, or locations

A

Basis

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22
Q

Is the risk associated with an unexpected widening or narrowing of the basis between the time a hedge position is establish and the time that it is lifted

A

Basis risk

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23
Q

Are standardized contracts for the purchqse and sale of financial instruments or physical commodities for future exchange

A

Futures

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24
Q

Are private, cash-market agreements between a buyer and seller fof the future delivery of a commodity at an agreement price; forwards contracts qre not standardized and not transferable

A

Forwards

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25
Q

Refer to the simultaneous purchase and sale of currencies or interest rate products in spot and forward market transaction

A

Swaps

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26
Q

Is the market in which cash transactions for the physical commodity occur, currencies, stocks and the like are brought and sold for cash and delivered immediately

A

Spot Market

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27
Q

Refers for future delivery

A

Forward Market

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28
Q

Are contracts that give the bearer the right, but not the obligation, to be long or short on a futures contract at a specified price (strike price) within a specified time period

A

Options

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29
Q

The futures contract that the long may establish by exercising the option

A

Underlying Futures Contract

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30
Q

Are contractual agreements designed to shift credit risk between parties

A

Credit Derivatives

31
Q

Were originally used primarilly by banks to hedge and diversify the credit risk of their customers in the event they could not pay back their loans

A

Credit Derivatives

32
Q

Is similar to an insurance contract, providing a buyer, usually a debt holder, with protection against the borrower not repaying their debt

A

Credit Default Swaps

33
Q

Are thw derivative product most widely used by banks and others

A

Interest rate swaps

34
Q

Is the fixed interest rate that the receiver gets in exchangw for the uncertainty of paying a floating rate (LIBOR) over time

A

Swap Rate

35
Q

The value of the swap’s fixed-rate flows is called

A

Swap spread

36
Q

The difference between the swap rate and the government bond yields for the same maturity

A

Swap spread

37
Q

Is a long-term agreement between counterparties to exchangw principal and periodic interest payments in diffwrwnt currencies (e.g. foreign exchange) durinf the life of the contract

A

Currency Swap

38
Q

Is one type of foreign exchange derivative

A

Currency Swap

39
Q

Are usually exchanged at the beginning and end of the contract and are based on thw current cash price of the currencies

A

Principal amounts

40
Q

The ratio of the currency amounts to be paid at ghe expiration of the currency swap

A

Forward Price

41
Q

Is a bilateral financial contract in which a buyer seeking protwction on loans or other assets makes periodic payments to a seller who is offering financial protection if a predefined credit event occurs

A

Credit Default Swaps

42
Q

Provide lenders with a credit insurance, and they provide sellers with a source of income

A

Credit Default Swaps

43
Q

a CDS covering multiple credit events

A

Basket Swap

44
Q

Are swaps in which the holder has no risk of financial loss if the underlying security fails

A

Naked Credit Default Swaps

45
Q

Allows traders to speculate by buying insurance on corporate or government bonds that they do not own

A

Naked Credit Default Swaps

46
Q

Major buyer of CDS (credit default swaps)

A

American Internation Group

47
Q

Are a type of structured asset-backed security (ABS) wgose value and payments are derived from a portfolio of fixed-income underlying assets

A

CDOs

48
Q

The portfolio is divided into different risk classes and maturities called

A

Tranches or slices

49
Q

The packaging and selling of loans, such as mortgages (MBS), and credit card loans

A

Securization

50
Q

are contracts that give the bearer the right, but not the obligation, to be long (own) or short (promise to sell) a futures contract on a security or commodity at a specified price within a specified time period

A

Options

51
Q

option buyer pays a premium to the seller for the right to buy (a call option) or to sell (a put option) the underlying asset at an agreed price (strike or exercise price) until the contract expires (expiry)

A

Options

52
Q

are options on the spot yields of U.S. Treasury securities

A

Interest Rate Options

53
Q

are settled for cash, rather than the delivery of a security.

A

Interest Rate Options

54
Q

refers to standardized contracts for the purchase and sale of financial instruments or physical commodities for future delivery on a reg- ulated commodity futures exchange.

A

Futures

55
Q

are based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, metals, weather, and real estate

A

Futures Contracts

56
Q

are debt obligations issued by financial institutions.

A

Covered bonds

57
Q

also called special purpose entities (SPEs)

  • are legal entities created by a sponsoring firm (also called the sponsor, originator, seller, or administrator)
A

Special Purpose Vehicles (SPVs)

58
Q

meaning that the bankruptcy of the sponsor will not affect the assets of the SPV

A

Bankruptcy Remote

59
Q

can be defined as the way we do things in this organization

A

Corporate Culture

60
Q

must be established, applied, and carefully monitored to ensure that they are being carried out across the entire firm.

A

Risk Management Policies

61
Q

is defined as a process, effected by an entity’s board of directors, management, and other personnel, applied in strategy setting and across the enterprise, de- signed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.”

A

Enterprise Risk Management

62
Q

The current and prospective risk to earnings or capital arising from violations of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policies and procedures, or ethical standards.

A

Compliance Risk

63
Q

arises in situations where the laws or rules governing certain bank products or activities of bank’s clients may be ambiguous or untested

A

Compliance risk

64
Q

Arises from the potential that a borrower or counterpart will fail to perform on an obligation.

A

Credit Risk

65
Q

The risk to capital and earnings arising from the conversion of a bank’s financial statements from one currency to another.

A

Foreign Exchange Transaction Risk

66
Q

Arises from the potential that unenforceable contracts, law suits, or adverse judgments can disrupt or otherwise negatively affect the operations or condition of a banking organization.

A

Legal Risk

67
Q

Arises from the potential that an institution will be unable to meet its obligations as they come due because of an inability to liquidate assets or obtain adequate funding (referred to as funding liquidity risk) or that it cannot easily unwind or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions (market liquidity risk).

A

Liquidity Risk

68
Q

The risk to a financial institution’s condition resulting from adverse movements in market rates or prices, such as interest rates, foreign exchange rates, or equity prices.

A

Market Risk

69
Q

Arises from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses.

A

Operational Risk

70
Q

Arises from the potential that negative publicity regarding an institution’s business practices, whether true or not, will cause a decline in the customer base, costly litigation, or revenue reductions.

A

Reputational Risk

71
Q

Arises from cyberattacks, bank robberies, fraud, or other such problems.

A

Security Risk

72
Q

The current and prospective impact on earnings or capital arising from adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry changes.

A

Strategic Risk

73
Q

WIDE RANGE OF RISK (10)

(CCFLLMORSS)

A

Compliance Risk
Credit Risk
Foreign Exchange Transaction Risk
Legal Risk
Liquidity Risk
Market Risk
Operational Risk
Reputational Risk
Security Risk
Strategic Risk

BANKING CHAPT 5&6 (2 decks)

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