Question
Match the following: A) Systematic Risk
1) Risk of price movements B) Operational Risk 2) Risk of economy C) Liquidity Risk 3) Long-term asset short-term liabilities D) Market Risk 4) Risk due to failure of systems and processSolution
- Systematic Risk - Systematic risk is the risk inherent to the entire market or market segment. Also known as un-diversifiable risk, affects the overall market, not just a particular stock or industry. Interest rate changes, inflation, recessions and wars all represent sources of systematic risk because they affect the entire market.
- Operational risk is the prospect of loss resulting from inadequate or failed procedures, systems or policies, employee errors, systems failures, fraud or other criminal activity, any event that disrupts business processes.
- Liquidity Risk -The liquidity risk of banks arises from funding of long-term assets by short-term liabilities, thereby making the liabilities subject to rollover or refinancing risk.
- Market Risk/ Price Risk -The risk of adverse deviations of the mark-to-market value of the trading portfolio, due to market movements, during the period required to liquidate the transactions is termed as Market Risk. This risk results from adverse movements in the level or volatility of the market prices of interest rate instruments, equities, commodities, and currencies. It is also referred to as Price Risk.
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