The asset transformation function potentially exposes the FI to A.foreign exchange risk.B.interest rate risk.C.technology risk.D.operational risk.E.trading risk.
Question
The asset transformation function potentially exposes the FI to A.foreign exchange risk.B.interest rate risk.C.technology risk.D.operational risk.E.trading risk.
Solution
The asset transformation function potentially exposes the FI to B. interest rate risk.
Here's why:
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Asset transformation involves taking short-term liabilities (like deposits) and turning them into long-term assets (like loans).
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This process exposes the financial institution (FI) to interest rate risk because the interest rates on short-term liabilities and long-term assets often move in different directions or at different speeds.
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For example, if interest rates rise, the cost of the FI's short-term liabilities (the interest it pays to depositors) might increase faster than the return on its long-term assets (the interest it receives from loans). This could squeeze the FI's profit margin.
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Conversely, if interest rates fall, the return on the FI's long-term assets might decrease faster than the cost of its short-term liabilities, also hurting the FI's profit margin.
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Therefore, the asset transformation function inherently involves interest rate risk.
Similar Questions
The example of asset transformation function of financial institutions is Group of answer choicestransferring of funds from one generation to another.investing short-term funds in off-balance sheet activities.transforming short term sources of funds into long term investments by taking short term deposits to fund long term loans.receipt of securities through electronic payments systems.
The asset transformation function can explain the situation that A.banks can operate at a low level of financial leverage.B.the liability structure of bank balance sheets tends to reflect a shorter maturity structure than does the asset structure.C.the use of off-balance-sheet activities will always reduce the risk to commercial banks.D.FIs can offer trust services. E.FIs can provide transaction services as well as advisory services to their customers.
Asset transformation can be described asA) borrowing long and lending short.B) borrowing short and lending long.C) borrowing and lending only for the short term.D) borrowing and lending for the long term.
Which of the following is not a clear benefit provided by financial institutions?Question 6Select one:a.Economies of Scaleb.Credit Risk Transformationc.Asset Transformationd.Liquidity Risk Transformatione.Economies of Scope
hich of the following statements is TRUE?A.An FI is net long in foreign assets if it holds more foreign liabilities than foreign assets. B.Off-balance-sheet activities often affect the shape of a FIs current balance sheet through the creation of contingent claims. C.For an FI to exactly hedge the foreign investment risk, the foreign currency assets must equal the foreign currency liabilities. D.Technology risk is the uncertainty that economies of scale or scope will be realized from the investment in new technologies. E.To be immunized against foreign currency and foreign interest rate risk, an FI should match either the size or the maturities of its foreign assets and foreign liabilities.
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