Risk Management 2 Flashcards
What is interest rate risk?
The risk that changes in interest rates will negatively affect the value of financial assets.
True or False: Interest rate risk only affects fixed-income securities.
False
Fill in the blank: The primary goal of interest rate risk management is to ______ the impact of interest rate fluctuations on an institution’s financial performance.
mitigate
What are the two main types of interest rate risk?
Market risk and cash flow risk.
What does ALM stand for in finance?
Asset and Liability Management.
Multiple Choice: Which of the following is a common tool used in interest rate risk management? A) Interest rate swaps B) Mortgages C) Stocks
A) Interest rate swaps
What does performance reporting in financial institutions typically include?
Metrics on profitability, risk exposure, and compliance with regulations.
True or False: Performance reporting is only relevant for internal stakeholders.
False
Explain the term ‘duration’ in the context of interest rate risk.
Duration measures the sensitivity of a bond’s price to changes in interest rates.
What is the purpose of a gap analysis in ALM?
To assess the timing differences between assets and liabilities.
Multiple Choice: Which of the following is NOT a performance indicator? A) Return on Equity B) Net Interest Margin C) Inflation Rate
C) Inflation Rate
Fill in the blank: A _______ is a financial derivative that allows two parties to exchange cash flows based on different interest rates.
swap
What is the primary objective of Asset and Liability Management?
To manage risks that arise from mismatches between assets and liabilities.
True or False: Effective interest rate risk management can lead to improved capital management.
True
What is ‘repricing risk’?
The risk that interest rates will change before a financial institution can reprice its assets and liabilities.
Multiple Choice: Which method is commonly used to measure interest rate risk? A) Value at Risk B) Return on Assets C) Debt to Equity Ratio
A) Value at Risk
Fill in the blank: A ________ report provides insights into the financial performance of an organization over a specified period.
performance
What is the significance of the yield curve in interest rate risk management?
It shows the relationship between interest rates and different maturities of debt.
True or False: Hedging can completely eliminate interest rate risk.
False
What does the term ‘liquidity risk’ refer to?
The risk that an institution will not be able to meet its short-term financial obligations.
Multiple Choice: What is typically included in a financial institution’s asset-liability committee discussions? A) Marketing strategies B) Interest rate risk exposure C) Employee benefits
B) Interest rate risk exposure
Fill in the blank: The _______ ratio is a key metric in performance reporting that indicates a company’s profitability relative to its total assets.
return on assets
What is ‘basis risk’?
The risk that the relationship between interest rates on different instruments will change.
True or False: Performance reporting is essential for regulatory compliance.
True
What role do financial derivatives play in interest rate risk management?
They are used to hedge against fluctuations in interest rates.
