Jason Lin

FIN 4808

HW#1

02/13/2018

6.

a. 400

b. 300, refinancing risk because the cost of getting another loan is greater.

c. 446

d. Interest rates have an inverse relationship with the price of a security. Therefore, if interest rate drops
by 100 basis points, the bond will sell at a premium.

e. The change of interest rates affected interest income/expense and change market value of the firm.

7. Matching maturities for assets and liabilities allows for corresponding changes to interest expense
and income according to the market’s interest rate. Asset transformation reinvest short-term bond into
long-term bond.

8. Having annual payment as oppose to semi-annual payment will exaggerate interest risk as fewer
payments would allow for a larger effect from changes in interest rates.

19. Foreign exchange risk is the risk FI are exposed from changing currency exchange rates. For an FI to
be net long in foreign assets, it has larger foreign currency assets than liabilities. Likewise, to be net
short refers to having greater foreign currency liabilities to assets. If domestic currency strengthens as
oppose to the foreign currency, a FI that net long will suffer losses. A FI that is net short will suffer losses
when domestic currency weakens compared to foreign currency.

26.

a. A loss of SF124.94 or -6.49%. The loss was comprised entirely of interest rate risk.

b. A gain of $25.96 or 3.89%. A loss of 6.49% due to interest rates but a gain of 10.38% from foreign
exchange risk.
27. Sovereign risk refers to the risk of government interference toward the repayment of foreign debt.
An FI has little recourse in such situations besides leveraging future money supplies or fund to the
country concerned.

28. Technology risk refers to the risk of when investments in new technologies fail to generate the cost-
saving expected. Economies of scale is when average cost of production decreases, while economies of
scope lower overall cost by producing new products with similar inputs as previous products. In FIs,
customer databases may be used different service products through an economy of scope. Sometimes
diseconomies can occur, such as excess capacity in an economy of scale or failure to generate previously
considered synergy in an economy of scope.