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Arm 401-9 Financial Risk With Solutions Verified By Experts
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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...

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  • October 7, 2024
  • 19
  • 2024/2025
  • Exam (elaborations)
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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

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