Products and Risk Flashcards
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Currency
Definition: A medium of exchange, unit of account, and store of value. Risks: inflation risk, FX risk, sovereign/devaluation risk.
Deposit accounts
Definition: Bank accounts for storing funds, earning interest, facilitating payments. Risks: bank default risk, inflation risk, liquidity/early withdrawal penalties.
Loans
Definition: Contracts lending funds in exchange for repayment plus interest. Risks: credit/default risk, interest‑rate risk, liquidity risk.
Bonds
Definition: Tradable debt instruments representing loans to issuers. Spread: yield over risk‑free rate. Risks: interest‑rate risk, credit/default risk, reinvestment risk, liquidity risk.
Stocks
Definition: Equity shares representing ownership in a corporation. Risks: market risk, volatility, company‑specific risk, liquidity risk.
Insurance
Definition: Contracts transferring risk to an insurer for premiums. Risks: moral hazard, adverse selection, underwriting risk, insurer solvency risk.
Forwards
Definition: Customized OTC contracts to buy/sell an asset at a set price on a future date. Risks: counterparty risk, liquidity risk, marking‑to‑market exposure.
Options
Definition: Rights to buy (call) or sell (put) an asset at a strike price before or at expiry. Risks: premium loss, Greeks risk (delta, gamma, vega), time decay.
Swaps
Definition: Agreements to exchange cash flows (e.g. fixed for floating interest). Risks: counterparty risk, basis risk, valuation/model risk.
Digitals
Definition: Binary options paying fixed amount if condition met at expiry. Risks: discontinuous payoff, hedging errors, model risk.
Choosers
Definition: Options allowing choice between call or put at decision date. Risks: high premium, complexity, model calibration risk.
