1. Off-balance-sheet items can generate cash flows that immediately impact the bank’s financial performance.
2. Off-balance-sheet activities are an important source of fee income for many FIs.
3. Off-balance sheet activities can have both positive and negative effects on the risk of the FI.
4. Off-balance-sheet activities generally have risk-reducing attributes, but seldom have risk-increasing
attributes.
5. Off-balance sheet positions are risky because they may yield negative future cash flows.
6. Off-balance-sheet items often are called contingent assets and liabilities because they may, or may not, affect
the balance sheet in the future.
7. Even though an FI has off-balance-sheet activities, the true net worth is equal to on-balance sheet assets
minus on-balance sheet liabilities.
8. All off-balance-sheet items will eventually move on to the balance sheet at some point in time.
9. An FI can protect itself against insolvency resulting from off-balance sheet activities by purchasing
insurance.
10. The delta of an option is the sensitivity of an option’s value to a unit change in the value of the underlying
asset.
11. All call options are eventually exercised and the underlying asset must be delivered.
12. The present value of an off-balance-sheet item is its notional value.
13. A default option is exercised when the holder requests a draw on the loan commitment.
14. If an FI enters into a loan commitment, it is essentially entering into a forward contract.
15. The current market value of an off-balance-sheet item is determined by finding the current market value of
the underlying item.
16. The Federal Reserve requires banks to complete schedule L with their quarterly call reports to list the
notional size and variety of off-balance-sheet activities.
17. The use of an up-front fee by a bank eliminates the contingent risk on a loan commitment.
18. The current market value or contingent claim value of OBS items overestimates their notional value.
19. The extremely high growth of OBS activities since the early 1990s has caused regulators to recognize the
potential risk exposure to FIs from their use.
20. Interest rate risk is part of the loan commitment contingent risk because of the uncertainty of changes in
interest rates before the borrower exercises his option to borrow.
21. One way to completely protect the lender against interest rate risk on a loan commitment is for the lender to
price the loan at a variable rate against some index.
22. An up-front fee on a loan commitment rewards the FI for its willingness to stand ready to lend the
commitment amount during some agreed upon time period.
23. Basis risk occurs on a loan commitment because the spread of a pricing index over the cost of funds may
vary.
24. The aggregate commitment funding risk can increase the cost of funds above normal levels.
25. Loan commitment activities increase the insolvency exposure of FIs that engage in such activities.
26. Derivative products used in managing contingent credit risk can only be acquired as over-the-counter
arrangements.
27. The ability to provide loan commitments is a signal to borrowers that the FI has a lower risk portfolio.
28. Commercial letters of credit are guarantees that are issued to cover contingencies that are potentially more
severe and less predictable than those covered by standby letters of credit.
29. Commercial letters of credit are used only in international trade.
30. In the U.S., commercial banks are the only issuers of standby letters of credit.
31. As compared to LCs, SLCs typically are used to cover contingencies that potentially are more severe and
which may not be trade related.
32. Standby letters of credit perform an insurance function similar to that of commercial and trade letters of
credit.
33. In many ways, SLCs perform similar functions for a borrower as do loan commitments.
34. The use of LCs and SLCs may result in an FI having a higher concentration ratio than desired for a
particular industry.
35. Contingent credit risk occurs with the use of derivative products and involves the potential default by a
counterparty.
36. Contingent credit risk on derivative contracts is more serious for futures contracts than for forward
contracts.
37. One way to minimize contingent credit risk is to use derivative products sold on organized exchanges.
38. Contingent credit risk is more serious for futures contracts than forward contracts because the
over-the-counter arrangements necessary to replicate the guarantees at a later date.
39. If an FI is a counterparty to a swap arrangement, it must record the notational value of the swap as the
market value.
40. If a commercial bank engages in OBS activities, there are no additional capital requirements imposed by
regulators.
41. Credit derivatives allow FIs to hedge credit risk on individual assets, but not on portfolios of assets.
42. More FIs fail as a result of credit risk exposures than either interest rate or FX risk exposure.
43. When-issued trading involves the commitment to buy and sell securities before they are issued.
44. Loans sold with no recourse have contingent liability off-balance-sheet implications for the FI that sells the
loan.
45. The Clearing House Interbank Payments System (CHIPS) is an international wire transfer system owned by
the participating banks in the countries in which it is used.
46. Funds transferred on Fedwire are settled at the end of the day.
47. Funds transferred on CHIPS are settled immediately.
48. Settlement risk on wire transfers involves intraday credit risk.
49. To be an affiliate of a holding company, the parent must own at least 50 percent of the shares of the affiliate
company.
50. The source of strength doctrine involving failed FIs in multibank holding company corporate structures has
been widely accepted by the courts.
51. Fees from derivative products are an increasing component of noninterest income for many FIs.
52. The estoppel argument used in bank failures is based on the concept of financial unsophistication.
53. The ability to form financial holding companies for the purpose of creating full-service financial institutions
has caused an increase in affiliate risk.
54. The amount of regulations that have been proposed because of the increased use of risk-reducing OBS
derivatives is increasing.
55. Where are the contingent items disclosed in the financial statements?
56. Loan commitments are classified as
57. Standby letters of credit are classified as
58. Rediscounted bankers’ acceptances are classified as
59. Loan loss reserves are classified as
60. When an FI pre-commits to lending at a fixed rate, it is exposed to
61. Up-front fees are charged as a certain percentage of
62. Back-end fees are charged as a certain percentage of
63. This refers to the fee charged on the unused balance of a loan commitment.
64. The quantity risk exposure of a loan commitment is
65. Takedown risk in a loan commitment exposes the FI to
66. Which of the following is true of an ‘adverse material change in conditions clause’ used in a loan
commitment?
67. An Adverse material changes in conditions clause is included in loan commitments to protect the FI against