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2010-04-12_221935_financial_risk_categories

2010-04-12_221935_financial_risk_categories - 1.A bank...

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1.A bank finances a $10 million, six-year fixed-rate commercial loan by selling one-year certificate of deposit. It is an interest rate risk as well as credit risk. It is an interest rate risk because change in interest rate can change the value of the fixed rate assets such as commercial loan. It is also a credit risk because cash flows from the loan may not be paid in full. It is exposed to interest rate as well as interest income. 2. An insurance company invests its policy premiums in a long-term municipal bond portfolio. It is an interest rate risk because returns on the portfolio may increase or decrese due to interest rate movements. It is exposed to interest rate as well as interest income. 3.A French bank sells two-year fixed-rate notes to finance a two-year fixed-rate loan to a British entrepreneur. First of all, it is a foreign exchange risk because it involves multi-currency transactions, ie, Euro and British pounds. Exchange rates between two currencies can change significantly over the period. Further, it is also a credit risk as loans may not be repaid.
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