Arm 401-9 Financial Risk With Solutions
Verified By Experts
Interest rate risk uncertainty over changes in interest rates and the effect of those changes
on a securities future value
ex. a firm invests $1m in a 10 yr gvmt bond that pays 3% interest annually. next year, if newly
issued bonds pay 3.5%, the MV of these bonds will drop. If newly issued bonds pay 2.5%, the
MV of these bonds will inc.
Exchange rate risk the risk that changes in exchange rate will affect the value of a firm's
assets and liabilities
ex. if the USD depreciates against the euro, one dollar buys fewer euros. A US buyer who is
making installment payment s in euros will need to pay more dollars to make the stated payments
in Euros
Liquidity risk represents uncertainty about the ability to convert an investment to cash
quickly with little loss of principle (w/in a short time pd and a small price range)
, Arm 401-9 Financial Risk With Solutions
Verified By Experts
Credit Risk the change that a debtor will not pay his obligations as they come due. credit
risk has ONLY negative potential
Price Risk unanticipated change in the cost of inputs or prices of products
both positive and negative potential
two aspects:
a. output
b. input
Output price risk the price charged for the firm's products or services
Input price risk the price of resources used to make the firm's products
Balance sheet snapshot of firm's financial position at a given point in time
, Arm 401-9 Financial Risk With Solutions
Verified By Experts
Balance sheet lists the firms 1. assets
2. liabilities
3. SH equity (aka owner's equity/net worth or book value or surplus), (the residual amounts
owned by the firm's owners)
BS equation assets=liabilities+SHE
Assets are either 1. current assets
2. noncurrent assets
current assets cash or assets likely to be converted to cash or consumed w/in 1 year
ex. marketable securities, A/R, inv
noncurrent assets not likely to be converted to cash or consumed w/in one year
Noncurrent assets are either 1. tangible
Verified By Experts
Interest rate risk uncertainty over changes in interest rates and the effect of those changes
on a securities future value
ex. a firm invests $1m in a 10 yr gvmt bond that pays 3% interest annually. next year, if newly
issued bonds pay 3.5%, the MV of these bonds will drop. If newly issued bonds pay 2.5%, the
MV of these bonds will inc.
Exchange rate risk the risk that changes in exchange rate will affect the value of a firm's
assets and liabilities
ex. if the USD depreciates against the euro, one dollar buys fewer euros. A US buyer who is
making installment payment s in euros will need to pay more dollars to make the stated payments
in Euros
Liquidity risk represents uncertainty about the ability to convert an investment to cash
quickly with little loss of principle (w/in a short time pd and a small price range)
, Arm 401-9 Financial Risk With Solutions
Verified By Experts
Credit Risk the change that a debtor will not pay his obligations as they come due. credit
risk has ONLY negative potential
Price Risk unanticipated change in the cost of inputs or prices of products
both positive and negative potential
two aspects:
a. output
b. input
Output price risk the price charged for the firm's products or services
Input price risk the price of resources used to make the firm's products
Balance sheet snapshot of firm's financial position at a given point in time
, Arm 401-9 Financial Risk With Solutions
Verified By Experts
Balance sheet lists the firms 1. assets
2. liabilities
3. SH equity (aka owner's equity/net worth or book value or surplus), (the residual amounts
owned by the firm's owners)
BS equation assets=liabilities+SHE
Assets are either 1. current assets
2. noncurrent assets
current assets cash or assets likely to be converted to cash or consumed w/in 1 year
ex. marketable securities, A/R, inv
noncurrent assets not likely to be converted to cash or consumed w/in one year
Noncurrent assets are either 1. tangible
