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Explanation:
Embedded optionality in banking brings about indeterminate cash flows on both the asset and liability sides. It’s normally not easy to predict whether or not outstanding options will be exercised. Such products pose risks that are significantly greater than most measures suggest.
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Q.2222 In the context of banking, certain financial products can significantly complicate the process of determining a bank's economic capital. This complexity arises due to the inherent risks and uncertainties associated with these products. Among the following options, which financial product is considered to be the most challenging when it comes to calculating a bank's economic capital?
A
Ordinary stocks
B
Preference shares
C
Bonds with embedded options
D
Fixed-rate interest rate loans