Financial risk forms : • Market value risk • interest rate risk, • exchange prices, •...

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Finance

Financial risk forms : • Market value risk • interest rate risk,• exchange prices, • Asset prices price • default risk • Risk ofliquidity
Non-Financial risk forms: • Business Risk( chances of failure ofbusiness) • Operational Risk (misconduct,fraud etc) • Accountingrisk (changes in GAAP/IFRS and comparability issues, managedearnings, etc.) • Legal and Regulation risk • Tax risk •environment risk • Strategic risk
Elaborate on each of the risk factors with examples

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3.8 Ratings (510 Votes)

Market Value Risk Market Value Risk refer to the risk that the market prices of the assets or underlyings held by an entity or individual may change resulting in a loss of capital to the entity or individual For exampleif you buy 1 unit of Common Stock of Apple at 100 you are susceptible to risk that the price of Apple Stock may fall below 100 Market Value risk is also considered as Systematic Risk Interest Rate Risk Interest Rate Risk entails change in the rate of interest from the contractually agreed rate of interest resulting in an increased interest cash outflow For example A manufacturing company enters into a contract with a Bank to borrow 100Mn at the rate of LIBOR 2 pa on 01012019 Assumin the rate of LIBOR to be 4 the current interest rate would come to 6 The expected cash outflow on account of interest rate payment for the commpany at the agreed rate would be 6Mn for the year However if the LIBOR changes to 45 as on 06302019 the interest that the manufacturer would now have to pay would be 65 45 2 resulting in an increase Cash Outflow of 250000 for the remainder of the year In order to hedge Interest Rate Risks banks and corporations usually enter to hedging contracts like Interest Rate Swaps and Interest Rate Derivatives Exchange Prices Risk Exchange Prices Risk refers to the risk that the exchange rate of any given foreign currency may deteriorate resulting in a loss to the participants in an Foreign Exchange currency contract FOREX traders dealing in Foreign Exchange contracts and people engaged in Import Export activities are largely exposed to Exchange Prices Risk For Example Mr A enters into a contract with Mr B to buy 100 CHFSwiss Francs by paying equivalent amount of US Dollars and subsequently sell them to MRC and buy back the Dollars As on 01012019 the exchange rate for CHFUSD is 105 Therefore in order to buy 100CHF MR A pays out 9524 100105 As on 01052019 MR A sensing that the exchange rates for dollars are deteriorating quickly approaches Mr C to sell the CHFs and buy back See Answer

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