Risk is the probability of an unfavorable event occurring that will negatively impact performance. There are two main sources of liquidity risk: primary sources like cash that can easily be converted to cash, and secondary sources like assets that are harder to convert quickly. Credit risk arises from a borrower failing to make required payments, and has two sources: lending and transactions before settlement. Market risk is the possibility of losses due to factors affecting financial market investments, such as interest rates, exchange rates, geopolitical events, or recessions. The European Central Bank will intervene if inflation increases by raising interest rates further to return inflation to its 2% target rate.
Risk is the probability of an unfavorable event occurring that will negatively impact performance. There are two main sources of liquidity risk: primary sources like cash that can easily be converted to cash, and secondary sources like assets that are harder to convert quickly. Credit risk arises from a borrower failing to make required payments, and has two sources: lending and transactions before settlement. Market risk is the possibility of losses due to factors affecting financial market investments, such as interest rates, exchange rates, geopolitical events, or recessions. The European Central Bank will intervene if inflation increases by raising interest rates further to return inflation to its 2% target rate.
Risk is the probability of an unfavorable event occurring that will negatively impact performance. There are two main sources of liquidity risk: primary sources like cash that can easily be converted to cash, and secondary sources like assets that are harder to convert quickly. Credit risk arises from a borrower failing to make required payments, and has two sources: lending and transactions before settlement. Market risk is the possibility of losses due to factors affecting financial market investments, such as interest rates, exchange rates, geopolitical events, or recessions. The European Central Bank will intervene if inflation increases by raising interest rates further to return inflation to its 2% target rate.
Risk is the probability of an unfavorable event occurring that will negatively impact performance. There are two main sources of liquidity risk: primary sources like cash that can easily be converted to cash, and secondary sources like assets that are harder to convert quickly. Credit risk arises from a borrower failing to make required payments, and has two sources: lending and transactions before settlement. Market risk is the possibility of losses due to factors affecting financial market investments, such as interest rates, exchange rates, geopolitical events, or recessions. The European Central Bank will intervene if inflation increases by raising interest rates further to return inflation to its 2% target rate.
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FRM Exam Questions
1. Risk is the probability of the occurrence of an unfavorable event that will have a negative effect on the performance. - Occurrence PROBABILITY of loss. Exposure to an unfavorable event: - May occur with probability. (p) - May not occur with probability (1-p) - Event EFFECT 2. 2 different sources of liquidity risk
The primary sources of liquidity, which are either cash or other resources that can be converted into cash very easily; and Liabilities The secondary sources of liquidity, which usually can’t be converted into cash as easily and fast as the primary sources and may imply asset sales or other actions that would affect a company’s operations. Assets
3. Credit risk and two different sources
A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. The two main sources are lending and transactions: (pre) settlement
4. Define market risk
Market risk is the possibility that an individual or other entity will experience losses due to factors that affect the overall performance of investments in the financial markets. Market risk may arise due to changes to interest rates, exchange rates, geopolitical events, or recessions.
5. Prices market risk
- Interest rates - Foreign exchange rates - Equity prices - Commodity prices 6. If inflation increases ECB- European Central BANK will intervene
The Governing Council decided to raise the three key ECB interest rates by 75 basis points. The Governing Council took its decision, and expects to raise interest rates further, to ensure the timely return of inflation to the ECB’s 2% medium-term inflation target.
7. Effect Financial leverage on return on equity
Effect of losses: negative impact on ROE Consequently, Negative impact on solvency
8. SOL 9. SOL 10. Positive if: ROA> INTEREST debt funding (= interest/ average liabilities) Negative if: ROA< interest debt funding (= Interest/average liabilities) 11. SOL 12. Future contract- exchange traded (regulated) public market - Contract can be traded - Central Clearing CCP- Margin requirements – No counterparty risk - Standardized contract/ Higher costs 13. Unsystematic risk is a risk specific to a company or industry, while systematic risk is the risk tied to the broader market. 14. A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. 15. There are four primary sources of risk that affect the overall market: interest rate risk, equity price risk, foreign exchange risk and commodity risk. ///// - Bought assets = long position- loss if price decrease - Sold assets= short position- loss if price increase 16. SOL 17. A forward contract is a private and customizable agreement that settles at the end of the agreement and is traded over the counter. A futures contract has standardized terms and is traded on an exchange, where prices are settled on a daily basis until the end of the contract. 18. Margin requirement is determined by volatility - Volatility= price fluctuations in the past - Higher volatility leads to higher margin requirement 19.
20. Equity-Based Financial Instruments, Types of Asset Classes of Financial Instruments
Financial instruments may also be divided according to an asset class, which depends on whether they are debt-based or equity-based. Cash and derivative instruments.
21. Interest Rate risk in the Banking Book
Trading book: Market risk includes: interest rate risk, equity position risk, settlement and counterparty risk and foreign exchange risk.
25.Look at FRM Week 2 26. Notably, a rise in holding period will increase the VaR number. One may also get same outcome by reducing probability level (i.e. increasing confidence level) adequately (instead of changing holding period).
