Why is credit risk important in financial risk management?

Question options: 5) is wrong

1)

It may cause a bank to borrow more than it needs in the form of interbank loan.

2)

Rising default risk may lead to a decline in the bank's market value of equity.

3)

Credit risk losses may result in the reduction of net worth below the regulatory minimum

4)

Liquidity risk will rise, causing the bank to liquidate some of its assets in a fire sale

5)

All of the above is correct

In a credit risk insurance such credit default swap, the party that bears the credit risk in the transaction is the:

Question options: 5) is wrong

1)

Credit rating agency

2)

Lending institution

3)

Subprime loan borrower

4)

Counterparty, that is the seller of the contract

5)

Counterparty, that is the buyer of the contract

If income GAP is negative,

Question options: 4) is wrong

1)

rate-sensitive assets are greater than rate-sensitive liabilities

2)

rate-sensitive assets are less than rate-sensitive liabilities

3)

rate-sensitive assets rise in value more than rate-sensitive liabilities in periods of rising rates

4)

interest income rises more than interest expense in periods of rising rates

Answer rating: 100% (QA)

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