Asset Securitization
Hedging
Narrow Banking
Forfeiting
Answer is Right!
Answer is Wrong!
The correct answer is: A. Asset Securitization
Asset securitization is the process of converting illiquid assets into tradable securities. This is done by creating a special purpose vehicle (SPV) that purchases the assets and issues securities backed by the cash flows from those assets.
When banks invest their deposit accruals in government securities, they are essentially securitizing their deposits. This is because the government securities are backed by the full faith and credit of the government, which makes them a very safe investment.
The other options are incorrect for the following reasons:
- B. Hedging is a technique used to reduce risk by offsetting one investment with another. For example, a company that exports goods may hedge against the risk of changes in exchange rates by buying currency futures contracts.
- C. Narrow Banking is a system in which banks are only allowed to hold a narrow range of assets, such as government securities. This is designed to reduce the risk of bank runs.
- D. Forfeiting is a process in which a bank seizes collateral from a borrower who has defaulted on a loan.
I hope this helps! Let me know if you have any other questions.