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Financial Institutions Study Guide of Quiz 3

by: Kwan

Financial Institutions Study Guide of Quiz 3 BU.231.710.W4.SP16

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About this Document

Derivatives Overview/Portfolio fundamentals/New Financial Products/Overview of Futures Contracts on Case-Shiller
Financial Institutions
Roger Staiger
Study Guide
50 ?




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This 2 page Study Guide was uploaded by Kwan on Tuesday May 3, 2016. The Study Guide belongs to BU.231.710.W4.SP16 at Johns Hopkins University taught by Roger Staiger in Spring 2016. Since its upload, it has received 36 views. For similar materials see Financial Institutions in Finance at Johns Hopkins University.


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Date Created: 05/03/16
QUIZ  3   1.   CHAPTER  13,15   Foreign Exchange Risk This chapter analyzed the sources of FX risk faced by FI managers. Such risks arise through mismatching foreign currency trading and/or foreign asset–liability positions in individual currencies. While such mismatches can be profitable if FX forecasts prove correct, unexpected outcomes and volatility can impose signifi- cant losses on an FI. They threaten its profitability and, ultimately, its solvency in a fashion similar to interest rate and liquidity risks. This chapter discussed possible ways to mitigate such risks, including direct hedging through matched foreign asset–liability books, hedging through forward contracts, and hedging through foreign asset and liability portfolio diversification. Market Risk In this chapter we analyzed the importance of measuring an FI’s market risk expo- sure. This risk is likely to continue to grow in importance as more and more loans and previously illiquid assets become marketable and as the traditional franchises of commercial banks, insurance companies, and investment banks shrink. Given the risks involved, both private FI management and regulators are investing increasing resources in models to measure and track market risk exposures. We analyzed in detail four approaches FIs have used to measure market risk: Risk- Metrics, the historic (or back simulation) approach, the Monte Carlo simulation approach, and the expected shortfall (ES) approach. The four approaches were also compared in terms of simplicity and accuracy. Market risk is also of concern to regulators. Beginning in January 1998, banks in the United States have had to hold a capital requirement against the risk of their trading positions. The novel feature of the regulation of market risk is that the Federal Reserve and other cen- tral banks (subject to regulatory approval) have given large FIs the option to cal- culate capital requirements based on their own internal models rather than the regulatory model. 2.   CHAPTER  26   Securitization In Chapter 1 we distinguished between FIs that are asset transformers and those that are asset brokers. By becoming increasingly reliant on securitization, banks and thrifts are moving away from being asset transformers that originate and hold assets to maturity. They are becoming asset brokers more reliant on servicing and other fees. This makes banks and thrifts look more similar to securities firms. Thus, over time, we can expect the traditional financial technology differences between commercial (and savings) banking and investment banking to diminish as more loans and assets are securitized. Three major forms of securitization— pass- through securities, collateralized mortgage obligations (CMOs), and mort- gage backed bonds—were discussed. Also, the impact of prepayment behavior on MBS valuation was discussed. Finally, recent innovations in securitization were described.


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