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Financial Institutions and Core Risks

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Questions and Answers

What are the four core risks faced by financial institutions according to Pergler (2012)?

Market risk, Interest rate risk, Foreign exchange risk, and Inflation risk

Price risk, Credit risk, Operational risk, and Liquidity risk

Market risk, Credit risk, Operational risk, and Commodity risk

Market risk, Credit risk, Operational risk, and Liquidity risk (correct)

What is the meaning of Specific market risk as per Pergler's classification?

The sensitivity of a stock/portfolio to a change in broad stock market indices

The chance that the market as a whole will fall in value

The parts of risk unique to a particular transaction including credit risk hidden in the instrument (correct)

The chance that changes in financial market prices and rates will reduce the dollar value of a security/portfolio

Which type of market risk focuses on the sensitivity of a stock/portfolio to a change in broad stock market indices?

General market risk

Credit risk

Interest Rate Risk

Equity Price Risk (correct)

What does Interest Rate Risk entail for fixed-income securities?

Increase in market interest rates leads to a decrease in security value Signup and view all the answers

What is the primary cause of Foreign Exchange Risk according to Pergler?

Open or imperfectly hedged positions in a particular currency Signup and view all the answers

Which type of market risk may arise from security price volatility and can be either systemic or unsystematic?

Equity Price Risk Signup and view all the answers

Study Notes

Pergler (2012) identifies four core risks faced by financial institutions: Market risk, Credit risk, Operational risk, and Liquidity risk.
Market risk involves the potential reduction in the dollar value of a security/portfolio due to changes in financial market prices and rates.
Price risk within market risk can be categorized into General market risk (related to overall market value decrease) and Specific market risk (unique to a transaction, such as hidden credit risk).
The four major types of market risk are: Equity Price Risk (sensitivity of a stock/portfolio to stock market index changes), Interest Rate Risk (fall in fixed-income security value due to market interest rate increase), Foreign Exchange Risk (arising from open positions in a specific currency).
Market risk principles can be applied to various price changes but may be more intricate for interest-bearing securities, FOREX, and international investments.

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Description

Test your knowledge on the four core risks faced by financial institutions according to Pergler (2012:4): Market risk, Credit risk, Operational risk, and Liquidity risk. Understand the concepts of general market risk and specific market risk in relation to financial market changes and investment values.