Search results
Results From The WOW.Com Content Network
According to Anne O. Krueger of the IMF, the combination of fixed exchange rates and unsustainable debt burdens can amplify the impact of currency mismatch risk. [1] Krueger proposes sound economic policies of reducing public debt and managing capital flows as ways of mitigating these crises.
Foreign exchange risk is the risk that the exchange rate will change unfavorably before payment is made or received in the currency. For example, if a United States company doing business in Japan is compensated in yen, that company has risk associated with fluctuations in the value of the yen versus the United States dollar. [1]
The purchaser of a cap will continue to benefit from any rise in interest rates above the strike price, which makes the cap a popular means of hedging a floating rate loan for an issuer. [1] The interest rate cap can be analyzed as a series of European call options, known as caplets, which exist for each period the cap agreement is in existence.
Volatility risk is the risk of an adverse change of price, due to changes in the volatility of a factor affecting that price. It usually applies to derivative instruments , and their portfolios, where the volatility of the underlying asset is a major influencer of option prices .
Nevertheless, the most commonly used types of market risk are: Equity risk, the risk that stock or stock indices (e.g. Euro Stoxx 50, etc.) prices or their implied volatility will change. Interest rate risk, the risk that interest rates (e.g. Libor, Euribor, etc.) or their implied volatility will change.
Collars, a hedging strategy combining puts and calls, is getting more popular, said bankers. This enables companies to participate in any rise in a currency, unlike forwards where the exchange ...
where is the maturity of the longest transaction in the portfolio, is the future value of one unit of the base currency invested today at the prevailing interest rate for maturity , is the loss given default, is the time of default, () is the exposure at time , and (,) is the risk neutral probability of counterparty default between times and .
All traditional risk-management tools (insurance, asset-liability management, portfolio etc.) cannot prevent systemic risk, while foreign exchange derivatives can efficiently avoid systemic risk by hedging the currency rates, which is brought by the adverse change of the prices in basic goods market.