CMA Final · Risk Management in Banking and Insurance · Sovereign Risk and Insolvency Risk
A bank lends in US dollars to a private manufacturing company located in a foreign country. The company is fully able to pay, but its government suddenly imposes exchange controls that block all outward remittances. Which risk has materialised for the bank?
The bank faces transfer risk, a component of country risk. The borrower can pay, but the government's exchange controls block the remittance of foreign currency out of the country. It is not settlement or basis risk because the cause is a sovereign restriction on transfers.
- ATransfer risk, a component of country riskCorrect
- BBasis risk on the loan portfolio
- CSettlement risk from a failed trade
- DReinvestment risk on the loan
Explanation
The borrower is solvent, but government action prevents conversion and remittance of foreign currency. This is transfer risk, which is part of country risk. Settlement risk concerns failed exchange of payments in a transaction, not currency controls.
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