Friction 1: Mortgagor and Originator - correct answer ✔The borrower may
not even be aware of the financing options available. On the other hand, the
lender may steer the borrower to products that are not suitable.
Friction 2: Originator and Arranger - correct answer ✔The arranger (issuer)
purchases the loans from the originators for the purpose of resale through
securitized products. The originator has superior knowledge about the
borrower (adverse selection problem).
Friction 3: Arranger and third-parties - correct answer ✔The arranger of the
pool of mortgages will possess better information about the borrower than
third parties including rating agencies, asset managers, and warehouse
lenders.
,Friction 4: Servicer and Mortgagor - correct answer ✔The servicer's role is to
manage the cash flows of the pool and follow up on delinquencies and
foreclosures. A conflict of interest arises for delinquent loans.
Friction 5: Servicer and third-parties - correct answer ✔The servicer faces a
moral hazard problem because their (lack of) effort can impact the asset
manager and credit rating agencies without directly affecting their own cash
flow distribution.
Friction 6: Asset manger and investor - correct answer ✔The investor relies
on the asset manager's expertise to identify and analyze potential investments
Friction 7: Investor and credit rating agencies - correct answer ✔Rating
agencies are compensated by the arranger and not the end user, the investor.
Default time distribution - correct answer ✔F(t) = 1 - e^(-lambda*t)
Coherent Risk Measure: Monotonicity - correct answer ✔If X < Y, then p(Y) <
p(X)
If the expected value of Y is greater than X, then the risk of Y is less than the
risk of X
Coherent Risk Measure: Translation Invariance - correct answer ✔p(X + c) =
p(X) - c
Like adding cash
Operational Risk Management: 3 Lines of Defense - correct answer ✔1.
Business Line Management
2. Independent Corporate operation RM function
3. Independent review/audit
Basel Suggestions for Sound Operational Risk Managemnet - correct answer
✔1. Strong risk management culture
2. Fully integrated with overall RM process
3. Board of directors reviews OR framework
4. Board approves risk appetite/tolerance
5. Well defined governance structure
6. Incentives incorporate risks taken
7. Approval for new line of business
8. Constant monitoring of OR
9. Internal controls to mitigate/transfer risk
10. Major business disruption plans
11. Disclosure
Risk Capacity - correct answer ✔Max level of risk an institution can take
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller Carzola98. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $13.99. You're not tied to anything after your purchase.
