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Flashcards in Risk Management Deck (17):
1

The risk that a sluggish economy will affect the value of a debt instrument

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2

The risk that an event in the investment's business sector will harm the investment

For example- the banking sector is sluggish- so even stocks of healthy banks suffer

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3

The risk that a debtor will be unable to make loan payments or pay back the principal

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4

The risk that a change in interest rates will adversely affect the value of the note

Example: Bond is for 10% but prevailing market rate is now 12%. If bondholder wants to sell it- they will have to sell it at a discount.

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5

It measures the volatility of an investment.

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6

Risk that impacts the entire market and can't be avoided or reduced through diversification

Example: Wars

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7

Relates to a particular industry or company

Example: You own stocks in ethanol plants and an untimely freeze kills all of the corn in the Midwest

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8

Beta measures how volatile the investment is relative to the rest of the market.

In other words- how quickly (and in what amount) does the value of the stock change when the market sways?

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9

It compares volatility of an investment to the market average.

Factors include both Systematic and Unsystematic Risk.

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10

An asset whose value is DERIVED from the value of another asset.

Derivatives are measured at Fair Value.

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11

Gives the buyer the option to buy or sell a financial derivative at a certain price

Traders use them to speculate where they think the price will be at a certain point and make a profit

Hedgers use them to offset risk

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12

A Forward Contract with a future value.

They are sold and traded on the futures market.

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13

Forward Contract to swap payment agreements

They are highly liquid and often valued using the Zero-Coupon method.

Example: Steve pays Sally a fixed payment with a fixed interest rate. Sally pays Steve a variable payment tied to a benchmark such as LIBOR

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14

Risk that a law or regulation will void the derivative

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15

Hedge that protects against the value of an asset or liability changing.

Changes in value are reported in earnings.

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16

A hedge that protects against a set of future cash flows changing.

Changes in value are reported in OCI.

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17

A hedge that protects against the value of a foreign currency changing.

For example- a foreign currency hedge might be used to protect against the following: If you have receivables denominated in a foreign currency and that currency dips in value - your receivables are worth less than before.

Risk Management