CMA Final · Risk Management in Banking and Insurance · Operational Risk and Off-Balance Sheet Risk
Which of the following off-balance sheet items of a bank is generally a contingent liability rather than a derivative contract?
A letter of credit issued for an importer is a contingent liability, because the bank pays only if a specified event occurs. Swaps, forwards and futures are derivative contracts deriving value from underlying rates or prices, so they are classified differently.
- AInterest rate swap
- BCurrency forward contract
- CLetter of credit issued on behalf of an importerCorrect
- DInterest rate futures position
Explanation
A letter of credit is a contingent obligation that crystallises only if the customer fails to pay or the condition is met. Swaps, forwards and futures are derivative contracts whose value depends on an underlying variable.
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