Risk Management Flashcards
The risk that a sluggish economy will affect the value of a debt instrument
Risk Management
The risk that an event in the investment’s business sector will harm the investment
For example- the banking sector is sluggish- so even stocks of healthy banks suffer
Risk Management
The risk that a debtor will be unable to make loan payments or pay back the principal
Risk Management
The risk that a change in interest rates will adversely affect the value of the note
Example: Bond is for 10% but prevailing market rate is now 12%. If bondholder wants to sell it- they will have to sell it at a discount.
Risk Management
It measures the volatility of an investment.
Risk Management
Risk that impacts the entire market and can’t be avoided or reduced through diversification
Example: Wars
Risk Management
Relates to a particular industry or company
Example: You own stocks in ethanol plants and an untimely freeze kills all of the corn in the Midwest
Risk Management
Beta measures how volatile the investment is relative to the rest of the market.
In other words- how quickly (and in what amount) does the value of the stock change when the market sways?
Risk Management
It compares volatility of an investment to the market average.
Factors include both Systematic and Unsystematic Risk.
Risk Management
An asset whose value is DERIVED from the value of another asset.
Derivatives are measured at Fair Value.
Risk Management
Gives the buyer the option to buy or sell a financial derivative at a certain price
Traders use them to speculate where they think the price will be at a certain point and make a profit
Hedgers use them to offset risk
Risk Management
A Forward Contract with a future value.
They are sold and traded on the futures market.
Risk Management
Forward Contract to swap payment agreements
They are highly liquid and often valued using the Zero-Coupon method.
Example: Steve pays Sally a fixed payment with a fixed interest rate. Sally pays Steve a variable payment tied to a benchmark such as LIBOR
Risk Management
Risk that a law or regulation will void the derivative
Risk Management
Hedge that protects against the value of an asset or liability changing.
Changes in value are reported in earnings.
Risk Management
