Risk Management Flashcards
1
Q
What is value at risk
A
- It is a measure of risk of investment.It measures
- -given normal market conditions
- within a specific time period
- how much an investment might lose - Two basic questions answered by VAR
- what is the worst case scenario
- what will be the loss
2
Q
Application of VAR
A
- Max. possible loss on any portfolio or trading position
- Benchmark for performance measurement
- Fix limiits for those dealing in front office of treasury department
- Enables management to make trading strategies
- Tool for asset and liability management esp. in banks
3
Q
Different POVs in which financial risk can be evaluated
A
- Stakeholder point of view: Shareholders worry about level of debt as they are prioritized last incase of winding up. Lenders worry default in repayment
- Company POV: Unable to meet creditors- liquidation
- Government : Failure of banks, sovereign debt crisis ( incld. willfull defaulter)
4
Q
Features of VAR
A
- Components: Time period, confidence level (95-99%) and loss
- statistical method: SD
- Time horizon
- Probability
- Risk control : set limits for max loss
- z score
5
Q
What are the 4 categories of financial risk
A
- counter-party
- interest rate
- currency
- political
6
Q
What are the indicators of counter-party risk
A
- Govt. regulations and hostility of foreign govt
- insolvency
- unable to acquire necessary resources
- let down by third party
7
Q
Ways to manage counter party risk
A
- Carry out due diligence before
- Not committing to a single entity / group/ connected entity
- knowing your exposure limits
- reviewing credit limits and procedure
- taking performance guarantee, insurance
- take rapid action in the likelihood of defaults
8
Q
Actions indicating political risk
A
- Govt fixing limits on price of products
- restrictions to use local investors, labours
- acquiring private property for public projects
- restriction on currency conversion
9
Q
how to mitigate political risk
A
1.check rating of the country in biz magazines
2.get local investors and suppliers
3.enter into joint ventures
4.negotiate before hand
Also look into the stability , popularity , political ranking , macro economic conditions and advise from embassies
10
Q
Actions on which currency risk is dependent
A
- Govt action like brexit
- nominal int rate: IRP
- Inflation rate : PPP
- Natural calamities
- War, coup
- Change in political parties and their atttitudes towards foreign investment
