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Answer: The credit quality of QBCo's assets will not necessarily decrease from issuing new loans to corporations headquartered in Brazil.
A is correct. The new corporate loans are collateralized by investment-grade sovereign securities. To a large extent, while sovereigns still bear some risk, they are reasonably liquid, low default risk, and are good risk mitigants. Thus, the bank's credit quality does not necessarily decrease with the issuing of new credits to local corporations. In addition, assuming the sovereign bonds used as collateral come from a number of countries, there may also be a diversification effect that will reduce QBCo's credit risk.
Author: LeetQuiz Editorial Team
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Quant Banking Corporation is considering a proposal to sell UK government bonds and subsequently use the proceeds to offer new loans denominated in Brazilian Real (BRL) to Brazilian corporations. Given this scenario, and under the assumptions that the average value-weighted duration of its assets remains unchanged, there are no other changes to the structure of its assets and liabilities, and all foreign exchange risks are fully hedged, which of the following statements will be accurate?
A
The credit quality of QBCo's assets will not necessarily decrease from issuing new loans to corporations headquartered in Brazil.
B
QBCo should manage its leverage-adjusted duration gap by taking long positions in government bond futures to address the risk of rising interest rates.
C
The trading book VaR of QBCo will show significant increase.
D
The liquidity coverage ratio of QBCo will show significant increase.
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