Quiz1 Flashcards
Commodity Risk
Risk due to changes in Raw materials
Currency Risk
Risk due to changes in exchange rates
Interest Rate Risk
Risk due to changes in interest Rates
Equity Risk
Probable loss due to market volatility
limited to systematic risk
Transaction Currency Risk
When currency exchange rates might change between the time of a transaction and time of settlement
Operating Currency Risk
Unexpected changes in currency exchange rates will adversely affect future operations
Currency Economic Risk
Translation Currency Risk
Net assets invested in a foreign country whose functional currency is not that of the parent company may be exposed to loss in value when converted to the parent currency
Risk, Uncertainty, Ignorance, Not Feasible
Risk: Probability Known, Outcome Known
Uncertainty: Probability Unknown, Outcome Known
Not Feasible: Probability Known, Outcome Unknown
Ignorance: Probability Unknown, Outcome Unknown
Expected Utility Theory & Prospect Theory
EUT: Expected Value (Risk lovers vs risk averse)
PT: Gain Domain/Loss Domain (Risk Seeking w/ losses)
Interest Rate Risk
Fixed Asset & Liability
Market Yield = Coupon; change in yield doesn’t change value
Market Yield < Coupon; drop in yield –> increase in value
Market Yield > Coupon; increase in yield –> Decrease in value
Interest Rate Risk Floating Asset and Liability
A > L; Increase in interest = Favorable, Decrease = Unfavoralbe
A = L; increase or decrease = immunized
A < L; Increase in interest Rate = Unfavorable, Decrease = Favorable
Asset is Floating & Liability is Fixed
Cash flow risk exposure with Assets
Fair Value risk exposure with Liability
Asset is Fixed & Liability is Floating
Fair Value risk exposure with Asset
Cash Flow Risk Exposure with Liability
Credit Risk
Risk of Default
Liquidity Risk
Risk of not being able to convert its assets into cash without incurring significant losses; inability to meet obligations and continue operations
Interest Rate Risk Takes Two Forms: Cash FLow Risk and Value Risk
Cash Flow Risk: impact of a change in interest Rates on a firm’s future cash flow
Value Risk: Impact of a change in interest rates on the value of a firm’s asset
EDF, Expected Default Frequency
(Asset Value - Debt Value )/ SD of Asset = # sd’s to default
Interest Rate GAP
RSAt - RSLt = GAPt
Dollar amount interest rate sensitive assets less dollar amount interest rate sensitive liabilities
RSA RSL = asset or liabilitiy that would be repriced
Negative GAP is bad
Change in net interest income = GAP * change in yield
Reprice Definition
Interest rate will reset before maturity
Generic Measures of Risk (4)
Max - Min
Bid - Ask Spread
Maturity Range
Basis Risk
Z scores for confidence intervals: How much are you likely to lose?
Z for 99% = 2.33
Z for 97.5% = 1.965
Z for 95% = 1.645
Multiply Z by standard deviation to the amount you are likely to lose
Measuring Credit Risk: CAMELS
Capital Adequacy Asset Quality Management Earnings Liquidity Sensitivity to Market
