Learning objectives: Assess methods that banks can use to determine their optimal level of risk exposure, and explain how the optimal level of risk can differ across banks. Describe implications for a bank if it takes too little or too much risk compared to its optimal level.
Questions:
600.1. Which of the following statements best summarizes good risk management (according to Stulz)?
a. Good risk management reduces the bank's exposure to danger
b. Good risk management optimizes the bank's value subject to constraints
c. A bank with good risk management practices should offer low risk to shareholders
d. Good risk management ensures that a bad outcome will not occur; i.e., eliminates so-called "bad risks"
600.2. What is the impact of the Modigliani-Miller theorem on banks?
a. If the Modigliani-Miller theorem is strictly true, then banks do not need to exist
b. If the Modigliani-Miller theorem is strictly true, then decision-making in a bank should be centralized
c. If the Modigliani-Miller theorem is strictly true, then banks can generally increase their value by increasing the quality of their credit rating
d. Because the assumptions of the Modigliani-Miller theorem are obviously not true, the theorem has neither any utility nor theoretical relevance to banks
600.3. If we are realistic and assume that the Modigliani-Miller does not apply in practice (i.e., certain of the theorem's assumptions are violated), which of the following is true about a bank?
a. In the ideal, the bank should implement fully decentralized decision-making
b. The optimal rating of a bank is generally not the highest rating because this would require the bank to give up too many valuable projects
d. If a bank's trader wants to write an grossly underpriced put, this trade is probably advisable as a so-called "good risk" as long as his bonus does not depend on the trade
c. The bank's risk appetite should not be flexible, it should be based on the an assessment and maintained consistently over a long time horizon in order to achieve clarity and credibility with shareholders and creditors
Answers here:
Questions:
600.1. Which of the following statements best summarizes good risk management (according to Stulz)?
a. Good risk management reduces the bank's exposure to danger
b. Good risk management optimizes the bank's value subject to constraints
c. A bank with good risk management practices should offer low risk to shareholders
d. Good risk management ensures that a bad outcome will not occur; i.e., eliminates so-called "bad risks"
600.2. What is the impact of the Modigliani-Miller theorem on banks?
a. If the Modigliani-Miller theorem is strictly true, then banks do not need to exist
b. If the Modigliani-Miller theorem is strictly true, then decision-making in a bank should be centralized
c. If the Modigliani-Miller theorem is strictly true, then banks can generally increase their value by increasing the quality of their credit rating
d. Because the assumptions of the Modigliani-Miller theorem are obviously not true, the theorem has neither any utility nor theoretical relevance to banks
600.3. If we are realistic and assume that the Modigliani-Miller does not apply in practice (i.e., certain of the theorem's assumptions are violated), which of the following is true about a bank?
a. In the ideal, the bank should implement fully decentralized decision-making
b. The optimal rating of a bank is generally not the highest rating because this would require the bank to give up too many valuable projects
d. If a bank's trader wants to write an grossly underpriced put, this trade is probably advisable as a so-called "good risk" as long as his bonus does not depend on the trade
c. The bank's risk appetite should not be flexible, it should be based on the an assessment and maintained consistently over a long time horizon in order to achieve clarity and credibility with shareholders and creditors
Answers here:
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