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Financial Risk

The document outlines various types of financial risks including Credit Risk, Liquidity Risk, Market Risk (subdivided into Equity, Interest Rate, Commodity Price, and Currency Risk), Operational Risk, Counterparty Risk, and Industry/Economic Environment Risk. Each risk is defined with its implications, such as potential defaults, inability to meet financial demands, and market disruptions. Understanding these risks is crucial for effective financial management.

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11 views13 pages

Financial Risk

The document outlines various types of financial risks including Credit Risk, Liquidity Risk, Market Risk (subdivided into Equity, Interest Rate, Commodity Price, and Currency Risk), Operational Risk, Counterparty Risk, and Industry/Economic Environment Risk. Each risk is defined with its implications, such as potential defaults, inability to meet financial demands, and market disruptions. Understanding these risks is crucial for effective financial management.

Uploaded by

auzviewer66
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Course

• Financial Risk

1
Risk Spectrum
• Various types of risks
– Credit Risk
– Liquidity Risk
– Market Risk
• Equity Risk
• Interest Rate Risk
• Commodity Price Risk
• Currency / Foreign Exchange Risk

2
Risk Spectrum
• Operational Risk
• Counter Party Risk
• Industry Risk / Economic Environment
Risk

3
Credit Risk
• A credit risk is the risk of default on a debt
that may arise from a borrower failing to
make required payments. In the first resort,
the risk is that of the lender and includes
lost principal and interest, disruption to cash
flows, and increased collection costs. The
loss may be complete or partial.

4
Liquidity Risk
• Liquidity risk is the risk that a company or
bank may be unable to meet short term
financial demands. This usually occurs due
to the inability to convert a security or hard
asset to cash without a loss of capital and/or
income in the process.

5
Market Risk
• It is the risk that an asset cannot be sold at a
fair value due to market disruptions or
impaired market access.

6
Market Risk
• Equity Risk
– A bank/DFI investment in stock market may
become vulnerable to losses if share prices and
dividend yields there on plunge due to market
fluctuation

7
Market Risk
• Interest Rate Risk
– A bank / DFI may have to face loss situations
due to change in bond process and yields
curves.

8
Market Risk
• Commodity Price Risk
– Price of oil metals etc. may go down as a result
of decreased interest. Thus investments made in
high interest rates regime may adversely affect
any may cause losses.

9
Market Risk
• Currency or foreign exchange risk
– Foreign exchange risk (also known as FX
risk, exchange rate risk or currency risk) is a
financial risk that exists when a financial
transaction is denominated in a currency other
than the domestic currency of the company.

10
Operational Risk
• Operational risk is the prospect of loss
resulting from inadequate or failed
procedures, systems or policies. Employee
errors. Systems failures. Fraud or other
criminal activity.

11
Counter Party Risk
• Counterparty risk is the likelihood or
probability that one of those involved in a
transaction might default on its contractual
obligation.

12
Industry Risk / Economic
Environmental Risk
• Unstable political environment as well as
all economical forces i.e. demand / supply /
per capital income etc. can adversely effect
economic growth

13

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