Jasmine T.

Benito
Bachelor of Science in Economics-4A
September 27, 2016
GENERAL RISK CATEGORIES:

Business Risk
- refers to the possibility of inadequate profits or even losses due to uncertainties e.g.,
changes in tastes, preferences of consumers, strikes, increased competition, change in
government policy, obsolescence etc .Every business organization contains various
risk elements while doing the business.
-implies uncertainty in profits or danger of loss and the events that could pose a risk
due to some unforeseen events in future, which causes business to fail.
-For example, an owner of a business may face different risks like in production,risks
due to irregular supply of raw materials, machinery breakdown, labor unrest, etc. In
marketing, risks may arise due to different market price fluctuations, changing trends
and fashions, error in sales forecasting, etc. In addition, there may be loss of assets of
the firm due to fire, flood, earthquakes, riots or war and political unrest which may
cause unwanted interruptions in the business operations. Thus business risks may take
place in different forms depending upon the nature and size of the business.
https://en.wikipedia.org/wiki/Business_risks

Market Risk
-is the possibility for an investor to experience losses due to factors that affect the
overall performance of the financial markets in which he is involved.Market risk, also
called "systematic risk," or non-diversifiable risk because it relates to factors, such as
a recession, that impact the entire market that cannot be eliminated through
diversification, though it can be hedged against. Sources of market risk
include recessions, political turmoil, changes in interest rates, natural disasters and
terrorist
attacks.
-is the risk that the value of an investment will decrease due to changes in market
factors. These factors will have an impact on the overall performance on the financial
markets and can only be reduced by diversification into assets that are not correlated
with the market such as certain alternative asset classes.
-Market risk is comprised of the unknown unknowns that occur as a result of
everyday life. It is unavoidable in all risky investments. It can also be thought of as
the opportunity cost of puttingmoney at risk.
-For example, Option A is an investment of $100 in a risk-free, FDIC-insured
Certificate of Deposit. Option B is an investment of $100 in SPY, the ETF that charts
the S&P 500 Index. If the expected return on Option A is 1%, and the expected return

on Option B is 10%, investors are demanding 9% to move their money from a riskfree investment to a risky equity investment.
http://www.investopedia.com/terms/m/marketrisk.asp
https://www.syndicateroom.com/learn/glossary/m/market-risk
http://www.investinganswers.com/financial-dictionary/investing/market-risk-2360
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Inflation Risk
-also called purchasing power risk, is the chance that the cash flows from an
investment won't be worth as much in the future because of changes in purchasing
power due to inflation.
-For example, $1,000,000 in bonds with a 10% coupon might generate enough
interest payments for a retiree to live on, but with an annual 3% inflation rate, every
$1,000 produced by the portfolio will only be worth $970 next year and about $940
the year after that. The rising inflation means that the interest payments have less and
less purchasing power. And the principal, when it is repaid after several years, will
buy substantially less than it did when the investor first purchased the bonds.

Interest-rate Risk
-is the chance that an unexpected change in interest rates will negatively affect the
value of an investment.
-For example, let's assume you purchase a bond from Company XYZ. Because bond
prices typically fall when interest rates rise, an unexpected increase in interest rates
means that your investment could suddenly lose value. If you expect to sell the bond
before it matures, this could mean you end up selling the bond for less than you paid
for it (a capital loss). Of course, the magnitude of change in the bond price is also
affected by the maturity, coupon rate, its ability to be called, and other characteristics
of the bond. One common way to measure a bond's interest rate risk is to calculate its
duration.
http://www.investinganswers.com/financial-dictionary/bonds/interest-rate-risk-979

Credit
-is a contractual agreement in which a borrower receives something of value now and
agrees to repay the lender at some date in the future, generally with interest. Credit
also refers to an accounting entry that either decreases assets or increases liabilities
and equity on the company's balance sheet. Additionally, on the company's income
statement, a debit reduces net income, while a credit increases net income.
-For example installment loans. One of the things lenders look at when evaluating
your creditworthiness is whether you have installment accounts and how youve
managed them. These are loans or purchases that require you to make the same
payment each month. For example, if you charge a $1,200 personal computer to your
credit card, you can stretch paying off that amount for years with revolving credit,
paying only the minimum payment on your total card balance each month. If you buy

the computer on installment, you might pay $100 per month for 12 months. Other
examples of installment credit include an auto or student loan.
http://classroom.synonym.com/good-examples-using-credit-11515.html

Liquidity
-the ease with which an investment can be bought or sold.
- is a measure of how easy it is to buy or sell an investment. An investment can be
described as 'liquid' if it is easy to buy or sell; for example shares in FTSE 100
companies.The level of liquidity may be lower in the case of small stocks or during
periods when the market is in turmoil - making it harder to buy or sell an investment.
https://www.syndicateroom.com/learn/glossary

Derivative Risk
-is a financial contract with a value that is derived from an underlying asset.
Derivatives have no direct value in and of themselve their value is based on the
expected future price movements of their underlying asset.
-Derivatives are often used as an instrument to hedge risk for one party of a contract,
while offering the potential for high returns for the other party. Derivatives have been
created to mitigate a remarkable number of risks: fluctuations in stock, bond,
commodity, and index prices; changes in foreign exchange rates; changes in interest
rates; and weather events, to name a few.
-For example say Company XYZ is involved in the production of pre-packaged foods.
They are a -large consumer of flour and other commodities, which are subject to
volatile price movements. In order for the company to assure any kind of consistency
with their product and meet their bottom-line objectives, they need to be able to
purchase commodities at a predictable and market-friendly rate. In order to do this,
company XYZ would enter into an options contract with farmers or wheat producers
to buy a certain amount of their crop at a certain price during an agreed upon period
of time. If the price of wheat, for whatever reason, goes above the threshold, then
Company XYZ can exercise the option and purchase the asset at the strike price.
Company XYZ pays a premium for this privilege, but receives protection in return for
one of their most important input costs. If XYZ decides not to exercise its option, the
producer is free to sell the asset at market value to any buyer. In the end, the
partnership acts as a win-win for both parties: Company XYZ is guaranteed a
competitive price for the commodity, while the producer is assured of a fair value for
its goods. In this example, the value of the option is "derived" from an underlying
asset; in this case, a certain number of bushels of wheat. Other common derivatives
include futures, forwards and swaps.
http://www.investinganswers.com/financial-dictionary/optionsderivatives/derivative2202

Cultural Risk

-is a term describing the values, beliefs, knowledge, attitudes and understanding about
risk shared by a group of people with a common purpose. This applies to all
organisations - including private companies, public bodies, governments and not-forprofits.
-is the set of encouraged and acceptable behaviors, discussions, decisions and
attitudes toward taking and managing risk within an institution.
https://www.theirm.org/knowledge-and-resources/thought-leadership/risk-culture.aspx
http://corporatecomplianceinsights.com/the-importance-of-risk-culture/

Currency Risk
-is the potential risk of loss from fluctuating foreign exchange rates when an investor
has exposure to foreign currency or in foreign-currency-traded investments. Currency
risk is sometimes referred to as exchange-rate risk. Holders of foreign bonds face
currency risk, as those types of bonds make interest and principal payments in a
foreign currency.
-For example, let's assume XYZ Company is a Canadian company and pays interest
and principal on a $1,000 bond with a 5% coupon in Canadian dollars. If the
exchange rate at the time of purchase is 1:1, then the 5% coupon payment is equal to
$50 Canadian, and because of the exchange rate, it is also equal to US$50. Now let's
assume a year from now the exchange rate is 1:0.85. Now the bond's 5% coupon
payment, which is still $50 Canadian, is worth only US$42.50. Despite the issuer's
ability to pay, the investor has lost a portion of his return because of the fluctuation of
the exchange rate.

Government Policy Risk

- Government risk is an investment term used to collectively describe the impact of
prospective changes in legislation, policies of the executive branch within existing
legislation, and corruption. It is typically referenced as distinct from other forms of
risk, such as market risk, credit risk, price risk, and natural risk when assessing the
viability of an investment project.

Expropriation Risk
-is the act of a government in taking privately owned property, ostensibly to be used
for purposes designed to benefit the overall public. In the United States, what is
referred to as "eminent domain" provides the legal foundation for expropriation. The
Fifth Amendment to the Constitution states that private property cannot be
expropriated "for public use without just compensation."