Topic 6 Flashcards
The future creates uncertainty as it is unknown, what is an exogenous shock?
A significant event which happens without warning, can have major and lasting effects on political, economic and social systems
What is volatility? Give an example
It is a source of uncertainty, refers to the extent to which there are large swings between highs and lows
The more volatile a situation is, the more unstable and difficult to predict it is
Eg)exchange rate fluctuations, interest rate fluctuations, weather changes
Uncertainty cannot be measured so it cannot be managed, but risk can, how can risk be measured?
By using past data, allows to estimate the likelihood of something happening again, this estimate is risk, risk can be measured in terms of probability
What is a pure risk?
If the possible change is something that will be harmful or damaging, will have only a negative outcome
Name 5 potential negative outcomes of a pure risk
Physical injury Death Damage/loss of possessions Legal liability Financial loss
What is a speculative risk?
Good or bad outcome, faced by someone taking a chance
Being aware of risks means we can make provisions, what sort of risks do financial providers face?
Banks face risk that borrowers will fail to repay loans or interest rates will rise
Insurers take on others risks and face risk of more losses than calculated
The impact of risk is measured in terms of the amount of financial loss, what does the amount of loss depend on?
The amount of exposure to the individual
The amount of loss to a bank is the amount they have lent out
What is expected loss?
Average amount of loss - eg) credit risk of failing to repay - the amount is based on past experience and knowledge of customers - because banks expect some loss, must consider ways of keeping loss under control
What is unexpected loss?
The amount by which actual loss might exceed the expected loss - banks must find out the reason why (unexpected shock or unrealistic predictions)
What is catastrophic loss?
Loss in excess of unexpected loss that is unlikely, but may happen, and if it does then consequences will be devastating
Name 10 aspects of uncertainty
Changing rates of inflation Stock market volatility Economic uncertainty Attitudes to credit and debt Institutional issues Tightening regulation Changing weather patterns Religious attitudes Ethical and environmental concerns Terrorist attacks
How does the government control inflation?
Use interest rates to curb inflation, rose in inflation means BoE will raise interest
Why is the government waiting to sell their shares in RBS and LBS?
To ensure it returns as much of the funds used to bail out the banks back to the public purse
Sale at lower price may gain support during general election but most analysts and economists agree that it is a better strategy to wait as funds will offset some government deficit
Who required RBS and LBG to undergo divestment?
The 2009 EUs Competition Commissioner
