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- When borrowers tend to pay back the loans to bankers earlier, the bank is facing a. Repricing risk b. Yield curve risk c. Basis points risk d. Embedded options riskIf ABC Bank’s ALCO targets the market value of shareholders’ equity in its interest rate risk management, is the bank positioned to gain or lose if interest rates fall? If interest rates rise by 1% for all assets and liabilities, what is the approximate expected change in the bank’s economic value of equity? Provide a specific transaction that the bank could implement in order to immunize its interest rate risk exposure.Banks use gap analysis to measure interest rate risk in their balance sheets. If firm XYZ is said to have a positive gap, this means: Group of answer choices C. Rate-sensitive assets exceed rate-sensitive liabilities B. Long-term assets are funded with short-term liabilities D. Rate-sensitive assets equal rate-sensitive liabilities A. Liabilities reprice before assets
- Please explain it why choosing option correct and wrong # Which of the following best describes interest rate risk? The risk that credit ratings will change, affecting the value of assets and liabilities The risk that banks will not be able to meet their liquidity requirements None of the above The risk that interest rates will rise or fall, affecting the value of assets and liabilitiesIs it correct to state that banks’ returns will be higher if interest rates increase? Outline the advantages and drawbacks of Gap analysis and Duration analysis.How does the stable inflation targeting approach impede bank flexibility? Explain the estimation of risk free rate in the global analysis of hurdle rates?
- Select all that are true regarding interest rate risk for the bank. A.Banksmakeprofitsfromhighratesondepositsandlowratesonloans. B.The steeper the yield curve, the more profitable the bank becomes. C.As long-term mortgage rates rise, borrowers are less likely to refinance or pay back their loans since they have locked in a lower rate, which results in slower than anticipated pay downs on the bank's MBS debt investment portfolio and a decrease in interest rate risk. D.When the short-end of the yield curve rises and the long-end falls, the bank's profits will increase. E.A bank's assets; money it lends out, and it's liabilities; money it uses to fund those assets, can mature or re-price at different times or at the same time.The central bank takes action that lowers interest rates dramatically. what is the effect of it to firm value? increase or decrease and why.How should a bank structure its liquid assets portfolio to take advantage of falling interest rates ? a. The bank should invest in short-term securities to minimise capital loss b. The bank should invest in long term securities to maximise capital gains. c. The bank should borrow at fixed interest rates d. The bank should issue certificate deposits with fixed interest rates. e. The bank should hold cash to maximise its interest income. Which option is correct
- If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of Treasury securities should interest rates rise, he could financial futures. A. sell put B. sell call C. buy put D.buy callWhich of the following statements regarding the banks motives for holding reserves is incorrect ? A ) If banks on average expect an increase in policy rates they will be inclined to decrease their reserve holdings. B ) As the opportunity cost of holding reserves increase ,ceteris paribus banks are expected to decreasetheir holdings. C ) Depending on the volatility of fund inflows and outflows banks adjust the amount of their reserve holdings accordingly. D ) Under instable financial conditions banks are inclined to hold higher amounts of reserves compared to normal levels.Explain market risk and discuss why banks are subject to this risk. Discuss how banks manage this risk using Value at Risk (VaR) modelling and examine the limitations of this approach.