Class%20#9%20461%20Risk%20Return0 - FI Risks and...

Info icon This preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
FI Risks and Performance Evaluation
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2 CE Presentations TODAY: Discuss Bank Project A THURSDAY: Christina Tseng and Chad Wherley Assignment: Text, Chapter 8
Image of page 2
3 Class Outline 1. What is risk? 2. Types of risks for FIs Credit risk Liquidity risk Interest rate risk Market risk Insolvency risk 3. Return 4. FI performance 5. Analysis techniques
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
4 1. What is risk ? How do we define risk ? FIs borrow and lend, that is their business. In doing so they expose themselves to various types of risks that exist because of the nature of their business (intermediation).
Image of page 4
5 2. Types of risks for FIs Total risk is the relevant concept of risk when we talk about risk and expected return and their impact on value . However, risk can be thought of as coming from different sources or FI exposures . Total risk is not just the “sum ” of these separate sources of risk, but understanding total risk exposure requires understanding the exposure to each of these risk sources.
Image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
6 Types of risk Risk types for a financial intermediary include: Credit risk Liquidity risk Interest rate risk Market risk Insolvency risk Let us consider each (briefly) in turn.
Image of page 6
7 Credit risk Risk coming primarily from assets , primarily loans. Financial assets are contracts . Credit risk, or default risk, deals with the potential for violation of the terms (default) of the contracts by borrowers. Many of the contractual terms deal with future cash flows (as in loans and bonds); credit risk is the possibility that expected cash inflows will not be received (when expected or in the amounts expected) Contracts can default in other ways , too
Image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
8 Liquidity risk Risk of not having the cash to make payments or take advantage of investment opportunities when needed. A lack of synchronization of cash in- and outflows; a net cash flow that can be negative that may be difficult (costly) to handle. We are concerned with day-to-day liquidity needs, not bank runs Ultimately we will examine how well a bank is prepared to handle negative net cash flows which will undoubtedly occur at times
Image of page 8
9 Interest rate risk Risk that changes in interest rates will change balance sheet values or interest cash flows in ways that affect firm value .
Image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern