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

In the context of sovereign risk, 'transfer risk' refers to the possibility that:

Transfer risk is the chance that a solvent borrower cannot convert local currency into foreign currency or remit funds abroad because the host government imposes exchange controls or payment restrictions. It is a component of country risk and differs from the borrower's own ability to pay.

  1. AA government's credit rating is revised upward by an agency
  2. BA borrower in a country cannot convert local currency into foreign currency or remit it abroad because of official restrictions, even though it is otherwise solventCorrect
  3. CA bank's trading book loses value because of a rise in domestic interest rates
  4. DA foreign subsidiary's profits are reduced by a change in accounting standards

Explanation

Transfer risk arises when a country imposes exchange controls or moratoria that block foreign-currency remittances by otherwise solvent borrowers. Rating upgrades are not a risk, and the interest rate and accounting options describe market risk and reporting effects instead.

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