Review Questions Flashcards
True or false: Funding liquidity risk is typically measured via bid-ask spreads.
False
What is an asset’s liquidity risk related to ?
How quickly and cheaply one can sell the asset.
true or false: Banks do maturity transformation by investing funds raised through share issues into long term assets.
false
True or false: Banks do maturity transformation by investing funds raised through securitizations into deposits.
False
True or false: Banksmakemoneybysettinginterestratesondepositsthatareabithigherthaninterest on mortgage loans.
False
How did banks in trouble manage to survive during the subprime crisis
government support
True or false: Credit risk includes default risk and recovery risk.
true
true or false: Banks are not exposed to market risk.
true
True or false: Securities are either subject to credit risk or market risk.
false
True or false: Market risk includes currency and commodity risks.
true
True or false: A 25 standard deviation in asset prices is large but likely.
false
True or false: Shortmemorybiasmayresultfromtheapplicationofstatisticalmodelsthatgive more weight to recent observations
True
True or false: Hyperbolic discounting is caused by small bonuses.
False
Often financial crises happen because of what 3 things?
1) Low interest rates create incentives for excessive lending.
2) Underwriting standard deteriorate.
3) Overconfidence.
True or false: During the subprime crisis mortgage defaults caused banks to restrict lending. Less lending reduced the risk in the system and as a result also sovereign risk went down.
False
True or false: Sovereign risk is not directly linked to retail and corporate default risk.
False
When does leverage amplify profit or losses?
For profit in good times
For losses in bad times
What does leverage show?
Relationship between debt and equity capital
True or false: Pass-through securitisations can produce AAA securities through tranching.
False
True or false: With tranching, losses from the original pool of assets are used to decrease the value of the lowest rated tranches first.
True
True or false: With tranching, gains from the original pool of assets are distributed starting from the lowest rated tranche.
False
What is the problem with CDO-squared securities?
It is difficult to assess their risk
True or false: During the subprime crisis, banks were largely unaffected by the subprime market because they had transferred the associated risk to other investors via securitisations.
false
True or false: It is incredible that CDOs caused trouble during the subprime crisis as they are simple products whose risks are easy to understand and measure.
false
True or false: Re-securitisations are subject to a lower level of counterparty risk than simple securitisations.
False
What happened to banks that used securitisations to transfer risk from the banking book to the trading book?
They were penalised by most stock markets
