Thursday, November 19, 2009
The price of a bond changes as interest rates change. Specifically, price moves in the opposite direction to the change in interest rates. That is, if interest rates increase, the price of a bond will decline; if interest rates decrease, the price of a bond will increase. This is the reason a bond will sell [...]
Monday, November 16, 2009
This is the risk that the prices of financial instruments, such as equities, in which a bank has a position falls. This could result in the bank suffering unrealized losses on any open positions it has.
Sunday, November 15, 2009
A foreign bank that borrows US$ and lends it out in its local currency is exposed to exchange risk. The main risk here is that the US$ appreciates against the local currency leaving it with a liability that in local currency terms it is greater than the value of its matching asset.
Saturday, November 14, 2009
Bank balance sheets are made up of a mix of fixed and floating rate assets and liabilities whose composition is continually changing over time. A bank that makes a lot of fixed rate loans, such as car loans, funded with floating rate deposits is exposed to the risk that interest rates rise. This will push [...]
Friday, November 13, 2009
Credit risk is the risk that a counterparty that owes, or potentially owes, a bank money fails to meet its obligations. For most commercial banks this is the most important risk to manage and price. A triple-A US company, such as General Electric, has very different risk characteristics than a small manufacturing company in an [...]
Thursday, November 12, 2009
Many people see banks and other financial services companies as conservative risk-averse organizations. Nothing could be further from the truth. Banks and insurance companies are in the business of managing and pricing risk. In essence they seek opportunities where the market price for accepting risk is higher than their own assessment of its likely cost.