12 Questions
What does risk in finance refer to?
The probability of an event
Why does interest rate risk arise for banks?
Due to mismatch in asset and liability maturities
What is credit risk?
The risk of borrowers' default or credit deterioration
How is interest rate risk defined for banks?
Declines of net interest income due to interest rate movements
What triggers a total or partial loss of the amount lent to a counterparty?
Default risk
How does business risk arise for banks?
Due to exposure to uncertain market events
What does credit risk refer to?
Deterioration of the borrower's credit standing which does not imply default but involves a higher likelihood of default
How is the economic value of a loan affected when the credit quality of the borrower declines?
The economic value decreases because the book value decreases
What is off-balance-sheet risk related to?
Contingent assets and liabilities activities that do not appear on an FI's balance sheet
What is liquidity risk?
Risk of being unable to raise cash when needed due to sudden liability withdrawals
How can liquidity risk lead to a solvency problem?
By generating runs on the institution
What does foreign exchange risk refer to?
The risk that exchange rate changes can affect the value of FI’s assets and liabilities denominated in foreign currencies
Explore the fundamental concepts of risk management, including definitions of risk, probability of events, uncertainty of outcomes, and quantifiable risks in finance. Learn about the randomness of investment returns and the concept of business risk.
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