ELEC 1/FMGT 121 RISK MANAGEMENT (MIDTERM SAMPLE TEST)

RISK

RISK

probability of loss

EXPOSURE

possibility of loss

FINANCIAL RISK MANAGEMENT

process to deal with the uncertainties resulting from financial markets

DIVERSIFICATION

This is an important tool in managing financial risks.

HEDGING

business of seeking assets or events that offset, or have a weak or negative correlation to, an organization's financial exposures.

CORRELATION

measures the tendency of two assets to move, or not move, together.

LONG FUTURES CONTRACT

used to hedge a short underlying exposure employs the concept of negative correlation.

INTEREST RATE

key component of financial risk

YIELD CURVE

It is a graphical representation for yield for a range of term to maturity

EXPECTATIONS THEORY

This theory suggests that forward interest rates are representative of expected future interest rates.

LIQUIDITY THEORY

This theory suggest that investors will choose longer-term maturities if they are provided with additional yield that compensates them for a lack of liquidity.

PREFERRED HABITAT HYPOTHESIS

This theory suggest that investors who usually prefer one maturity horizon over another can be convinced to change maturity horizons in exchange for an appropriate premium. It is also depends on the policies of market participants

MARKET SEGMENTATION THEORY

This theory suggest that different investors have different investment horizons that arise from the nature of their businesses or as a result of investment restrictions.

CAPITAL FLOWS

key in determining exchange rates.

PURCHASING POWER PARITY

This theory is based on "the law of one price" that suggest exchange rates are in equilibrium when the prices of goods and services in different countries are the same.

BALANCE OF PAYMENTS APPROACH

This theory suggests that exchange rates result from trade and capital transactions that, in turn, affect the balance of payments.

MONETARY APPROACH

This theory suggests that exchange rates are determined by a balance between the supply and demand of money.

ASSET APPROACH

This theory suggests that currency holdings by foreign investors are chosen based on factors such as real interest rates, as compared with other countries.

SYSTEMATIC RISK

types of risk that emanate within the market that happen externally. Inflation, interest rates, etc. are examples of it.

UNSYSTEMATIC RISK

types of risk that emanate within the company that happen internally. The company fully controlled the situation.

FINANCIAL MARKET

system that the buyers and sellers intend to use to trade financial instruments.

MONETARY POLICY

actions of central banks to promote sustainable economic growth by controlling the overall supply of money that's available to their national banks.

OVERNIGHT BORROWING RATES/ OVERNIGHT RATES

interest rate at which a depository institution lends or borrows funds overnight in the market from another depository institution.

REPORATES

The central bank gives loans to commercial banks for lending to the public at the rate of interest charged by the central bank on these loans.

FORWARD INTEREST RATE

acts as a discount rate for a single payment from one future date and discounts it to a closer future date.

FUTURE INTEREST RATE

A fixed standard agreement between a buyer and seller for the delivery of a specific financial instrument on a given future date at an agreed price.

EFFICIENT FRONTIER

modern portfolio theory tool that shows investors the best possible return they can expect from their portfolio, given the level of volatility they're willing to accept.

STANDARD DEVIATION

model that describes the possibilities or chances that help us determine the outcome.

CAPITAL ASSET PRICING MODEL

shows the relationship between the expected return and market risk. It used to decide if the stock should be included in a diversified portfolio or not. It is also used to find the cost of equity for a stock and for valuation purposes.

BETA

shows the relationship between investment and the market. It is also to measure market risk.

ALPHA

measure the extra return on a portfolio in excess of that predicted by CAPM

ARBITRAGE PRICING THEORY

This theory suggests that returns depend on several factors that lead to the result of the expected return being linearly dependent on the realization of the factors.

RISK AGGREGATION

aims to get rid of non- systematic risks with diversification

RISK DECOMPOSITION

tackles risks one by one

COMMERCIAL BANKING

Taking deposits, making loans (wholesale or retail)

INVESTMENT BANKING

Raising debt and equity for companies; advice on mergers and acquisitions, restructurings, trading, etc

ENGLISH AUCTION

A common form of auction is where an item for sale and its lowest price are presented. Buyers then bid, pushing the price higher until one buyer is left willing to pay his (latest) bid.

DUTCH AUCTION

Individuals and companies bid by indicating the number of shares they want and the price they are prepared to pay.The price paid is the lowest bid that leads to all the shares being sold.

ORIGINATE TO DISTRIBUTE MODEL

this model is very popular way of handling mortgages during the 2000 to 2007 period. Banks originated loans and then packaged them into products that were sold to investors. This frees up funds to make more loans.

REPRICING MODEL

This model can be called a "funding gap" that is based on book value. It is also contrasted with market value-based maturity and duration models in the appendix.

RATE SENSITIVITY

means repricing at current rates.

REPRICING GAP

the difference between interest earned on assets and interest paid on liabilities.

REFINANCING RISK

possibility that an individual or company would not be able to replace a debt obligation with new debt at a critical time for the borrower.

REINVESTMENT RISK

possibility that an investor will be unable to reinvest cash flows received from an investment.

MATURITY MODEL

this model explicitly incorporates market value effects.

DURATION

The average life of an asset or liability. The weighted-average time to maturity using present value of the cash flows, relative to the total present value of the asset or liability as weights.

UNBIASED EXPECTATIONS THEORY

this theory suggest that yield curve reflects market's expectations of future short-term rates.reflects market's expectations of future short-term rates.

LIQUIDITY PREMIUM THEORY

this theory Allows for future uncertainty. Premium required to hold long-term