Financial Risk

Question 1

Market Risk

Answer 1

The risk that the value of an investment portfolio will decrease due to changes in the market.

Question 2

Asset-backed risk

Answer 2

The risk that changes in assets supported by an asset-backed security will significantly impact the value of the supported security. It can be mitigated by ensuring that the assets used to support debt are valued well above the loan value.

Question 3

Credit risk

Answer 3

The risk that the borrower goes into default. Can be mitigated through background checks, insurance and non-recourse debt factoring

Question 4

Liquidity Risk of investments

Answer 4

The risk that a security cannot be traded quickly enough to prevent a loss or make a profit.

Question 5

Investment Risk

Answer 5

Risks that are related to investments in shares or loans made, including other creditors.

Question 6

Economic Risk

Answer 6

The potential impact on a company’s profitability caused by changing economic positions affecting interest rates, exchange rates and the general market conditions in a particular country in which a business operates.

Question 7

Diversification

Answer 7

Reducing risk by investing in a variety of shares, loans and other assets. This has the effect of avoiding exposure to losses on any individual investment

Question 8

Derivatives

Answer 8

Forward contracts, options and futures are referred to as derivatives since their value derives from underlying items, such as exchange rates and interest rates.

Question 9

The fair value of derivatives

Answer 9

Is the market value - which may be determined from stock market prices if available

Question 10

IAS 39

Answer 10

Financial instruments - derivatives have to be stated at their fair value at year end, with movement going to the P&L or reserves.