The LDC Bank specializes in foreign exchange transactions and lending to emerging market countries. They have provided a loan to the country of Tinia so that Tinia can install a water irrigation system in the interior of the country. The LDC Bank is very careful with their lending practices, calculating the probability of a country’s default through the use of simulation. They have also entered into a currency swap that allows them to receive Mexican pesos in exchange for paying U.S. dollars. Which of the following risk is NOT explicitly mentioned in these series of transactions by the LDC Bank? A) Herstatt risk. B) Regulatory risk. C) Model risk. BigBank engages in foreign exchange transactions. They have just provided a forward contract to a major multinational corporation that allows the corporation to sell Swiss francs in 90 days. They have also entered into a currency swap that allows them to receive Japanese yen in exchange for paying U.S. dollars. Furthermore, they are in the process of selling a large position in Canadian dollars in the spot market. Which of the following risks is NOT explicitly mentioned in these series of transactions by BigBank? A) Operations risk. B) Herstatt risk. C) Liquidity risk. When describing the risk exposures that an analyst should examine as part of an enterprise risk management system, what terms describe the risks pertaining to the factors that directly affect firm or portfolio values and the risks associated with external capital markets? ------Firm/Portfolio Value----------- External Capital Market A) ------ Market risk ----------------- Financial risk B) ------ Market risk ----------------- Factor risk C) ------ Systematic risk ------------ Financial risk
What the hell is Herstatt risk?!
Herstatt risk is another name of Settelment risk. see the top right of second page in risk management reading in schweser.
Fuck Schweser.
You are one fiesty recycler! What happened did your local municipality cut recycling pickup down from twice a week to once?
I’m going to have a stab and say 1.) B 2.) A 3.) A Those questions are pretty tough…
Bankin’ Wrote: ------------------------------------------------------- > You are one fiesty recycler! What happened did > your local municipality cut recycling pickup down > from twice a week to once? Nope, they decided to start calling it a waste reclamation service now instead of good ole recycling like the EPA Institute does.
Your answer: C was incorrect. The correct answer was B) Regulatory risk. Regulatory risk is due to the fact that different securities in a firm’s portfolio are subject to regulation by different regulatory bodies. Although the LDC Bank is sure to have exposure to regulatory risk, it is not explicitly described in these transactions. Model risk refers to the risk that models may fail due to poor inputs or construction. The bank’s use of simulation to predict country default is subject to model risk. Herstatt risk or settlement risk is the possibility that one party could default on a contract while the other is settling. This has been a problem in foreign exchange markets due to time differences and is certainly possible in the LDC Bank’s currency swap. Your answer: A was correct! Operations risk is the potential for failures in the firm’s operating systems due to personnel, technological, mechanical, or other problems. Although BigBank is sure to have exposure to operations risk, it is not explicitly described in these transactions. Herstatt risk or settlement risk is the possibility that one party could default on a contract while the other is settling. This has been a problem in foreign exchange markets due to time differences and is certainly possible in BigBank’s currency swap. Liquidity risk refers to the potential for sustaining losses due to the inability to sell or buy a position quickly. BigBank’s sale of the Canadian dollars is subject to liquidity risk. Your answer: A was correct! Financial and non-financial risk factors are general terms. Financial risk factors are those associated with external capital markets and the transactions within external markets. Non-financial risk factors capture other types of risk. Financial risk factors include market risk, liquidity risk, credit risk, and sovereign risk. Market risk pertains to the factors that affect firm or portfolio values (e.g. interest rates, exchange rates, equity prices, commodity prices, etc.). Non-financial risk factors include settlement (Herstatt) risk, operations risk, model risk, sovereign risk, regulatory risk, and other miscellaneous risk factors. Note that sovereign risk has both financial and non-financial risk components.
Nice job Jack.