An Australian FI That Invests €50 Million in Three-Year Maturity

question 62

Multiple Choice

An Australian FI that invests €50 million in three-year maturity loans and partially funds these loans with €30 million one-year deposits is exposed to the following risks.

• A)A depreciation of the euro against the Australian dollar plus credit risk plus refinancing risk, such as increasing interest rates in the Eurozone.
• B)An appreciation of the euro against the Australian dollar plus credit risk plus refinancing risk, such as increasing interest rates in the Eurozone.
• C)A depreciation of the euro against the Australian dollar plus credit risk plus reinvestment risk, such as decreasing interest rates in the Eurozone.
• D)A depreciation of the euro against the Australian dollar reinvestment risk, such as increasing interest rates in the Eurozone.

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Definitions:

Parol

Relating to or given by word of mouth; not in writing or formalized in documents.

Parol Evidence Rule

A rule in contract law that prevents parties from presenting evidence of prior or contemporaneous agreements that would contradict the written terms of the contract.

Oral Contracts

Agreements made through spoken communication that are binding, albeit harder to prove than written contracts.

Prenuptial Agreements

Legal contracts entered into before marriage, outlining the division of assets should the marriage end in divorce.