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Define risk and describe some of the major sources of risk
Risk is defined as the unexpected variability of asset prices and/or earnings
- Sources of risk
Differentiate between business and fiancial risks and give examples of each
Business Risk : daily operations and risk that result from business decisions and the business environment. Impacts the firm's operations and sales. Example : strategic and macroeconomic risks
Fiancial Risks : results of a firm's financial market activities. Example : Change in interest rate after issuance of floating-rate bonds
Relate significant market events of the past several decades to the growth of the risk management industry
- Deregulation : led to increase in interest rate sensitivity.
- Globalization : led to firms doing business outside their respective domestic boarders causing more exposure to currency changes
Describe the functions and purposes of financial institutions as they relate to financial risk management
- Function : financial institutions serve as financial intermediaries for managing financial risk.
- Purposes : create markets and instruments to share and hedge risks, provide risk advisory services, and act as counterparty by assuming the risk of others
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