Chap07_Saunders7e_SLIDES

Chap07_Saunders7e_SLIDES - CHAP-7 RISK Overview This...

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Unformatted text preview: CHAP-7 RISK Overview This chapter discusses the risks faced by financial institutions: Interest rate risk, market risk, credit risk, off-balance- sheet risk, foreign exchange risk, country or sovereign risk, technology risk, operational risk, liquidity risk, and insolvency risk Note: These risks are not unique to FIs Faced by all global firms 7-1 Risks of Financial Intermediation Interest rate risk resulting from mismatch in asset & liability maturities: Spread changes as interest rates change Since value = PV(Cash flows), equity affected Balance sheet hedge via matching maturities of assets and liabilities is problematic for FIs Inconsistent with asset transformation role Refinancing risk Reinvestment risk 7-2 Market Risk Incurred in trading of assets and liabilities (and derivatives) Short view of time horizon Value at risk (VAR), daily earnings at risk (DEAR) Market meltdown 2008-2009 Mortgage backed securities Toxic assets Lehman Brothers, Merrill Lynch, AIG 7-3 Market Risk Market, or trading, risk present whenever an FI takes an open or unhedged long or short position...
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Chap07_Saunders7e_SLIDES - CHAP-7 RISK Overview This...

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