Question

Which of the following risks facing financial institutions is/are the most relevant for a commercial bank?

I. credit (or default) risk
II. foreign exchange risk
III. interest rate risk
IV. liquidity risk
V. sovereign risk

	a.	I only
	b.	I, III, and IV
	c.	I, II, III, and IV
	d.	All of the risks listed are equally important at a commercial bank.

Answer 1

b. I, III, and IV

i. Credit risk - since it is a commercial bank, the risk of default of commercial loans is of great relevance.

ii. Foreign exchange risk - it is a commercial bank and not an investment bank, hence foreign exchange risk is not of much relevance.

iii. Interest rate risk - it is very relevant for a commercial bank.

iv. Liquidity riak - it is of great relevance as understood after 2008 crisis

v. Sovereign risk - it is of little importance to commercial bank

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