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CMA Final · Risk Management in Banking and Insurance · Sovereign Risk and Insolvency Risk

In the context of cross-border lending, 'transfer risk' is best described as the risk that:

Transfer risk is the chance that a solvent foreign borrower cannot pay external creditors because its government restricts currency convertibility or remittance of foreign exchange. It is a country-risk component, different from ordinary credit downgrade risk or exchange rate movements.

  1. AA borrower in a foreign country cannot obtain foreign currency to service its external debt because of government-imposed restrictions on convertibility or remittanceCorrect
  2. BThe lender's own capital falls below the regulatory minimum after a foreign loan is made
  3. CThe foreign borrower's credit rating is revised downwards by an agency
  4. DThe exchange rate between two currencies moves because of changes in interest rate differentials

Explanation

Transfer risk arises when a sovereign restricts convertibility or remittance of foreign currency, so even a solvent private borrower cannot pay external creditors. Rating downgrade risk is a credit migration issue, and exchange rate movement caused by interest differentials is plain market (FX) risk, not a transfer restriction.

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