Tiêu đề Unit 6.docx ✅

Unit 6 Risk for Financial Institutions and their Management • Types of Risk: Market Risk (Interest Rate Risk and Exchange Rate Risk), Credit Risk, Liquidity risk, and Operational Risk; • Management of these Risks. Types of Risk: 1. Market Risk (Interest Rate Risk and Exchange Rate Risk) 2. Credit Risk, 3. Liquidity risk, and 4. Operational Risk; Market Risk (Interest Rate Risk and Exchange Rate Risk) and Their Management Market risk, also known as systematic risk or non-diversifiable risk, refers to the risk of losses in an investment due to factors that affect the entire market or a specific segment of the market. It is inherent to the overall market movements and cannot be eliminated through diversification. Market risk arises when FIs actively trade assets and liabilities rather than holding them for longer period of time.
Types of Market Risk: 1. Interest Rate Risk(IRR) Interest rate risk arises from fluctuations in interest rates, impacting the value of fixed-income securities such as bonds and other debt instruments. When interest rates rise, bond prices typically fall, and vice versa. This risk affects both individual investors and financial institutions holding fixed-income investments. In mismatching the maturities of its assets and liabilities as a part of its asset’s transformation function, a FIs potentially exposes itself to IRR. Refinancing Risk: When maturity of liability is less than assets maturity. Reinvestment Risk: When maturity of liability is more than assets maturity. KA