Question

1. Sovereign country risk exposure is a result of the FI's inability to be fully diversified....

1. Sovereign country risk exposure is a result of the FI's inability to be fully diversified. t/f please explain.

2. Demand deposits pose a liquidity risk for FIs because funds may be withdrawn at any time.  t/f please explain.

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Answer #1

1. False; Sovereign country risk of defaulting or the risk that a country will fail to meet the obligations or not honour the payments. Altering of foreign exchange regulations also will come under this. In a wider perspective this is not caused by Financial Institutions inability to diversify because other macro economic factors and country wise factors and policy will cause this risk.

2. True; Liquidity risk implies the risk where a FI or a Bank will not be able to meet is short term obligation because of the difficulty in converting the assets or securities to cash. As Demand deposits is high for a FI, the FI has to find more liquid assets that can be converted easily to cash since Demand deposits can be withdrawn any time by the customer.

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