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BU8300 - Financial Risk Management
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Insolvency risk is the risk that an FI may not have sufficient capital to offset a sudden decline in the value of its assets relative to its liabilities.
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The increased integration of global economies has universally decreased all risks associated with financial intermediation.
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Direct foreign investments can benefit an FI by offering returns that may not be perfectly correlated with domestic investments.
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To mitigate sovereign risk, an FI might:
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Technology risk is the uncertainty that investments in new technology may fail to yield anticipated efficiencies or competitive advantages.
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Foreign exchange risk affects the value of assets and liabilities denominated in foreign currencies due to exchange rate fluctuations.
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Off-balance-sheet activities are not recorded on the current balance sheet because they represent contingent claims.
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In the context of a trading portfolio, “value at risk” (VaR) is best defined as:
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Liquidity risk occurs when sudden depositor withdrawals force an FI to liquidate assets quickly and at depressed prices.
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Diversification in a loan portfolio reduces firm-specific credit risk because it:
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