refers to the probability of loss

(a)  

is the possibility of loss

(a)  

arises as a result of exposure.

(a)  

is a process to deal with the uncertainties resulting from financial markets.

(a)  

contains assets whose returns are dissimilar, in other words, weakly or negatively correlated with one another

(a)  

Diversification among (a)   may reduce the risk that unexpected events adversely impact the organization through defaults.

Diversification among (a)   reduces the magnitude of loss if one issuer fails.

Diversification of (a)   reduces the possibility that an organization will have its business adversely affected by changes outside management’s control.

is the business of seeking assets or events that offset, or have weak or negative correlation to, an organization’s financial exposures.

(a)  

measures the tendency of two assets to move, or not move, together. This tendency is quantified by a coefficient between –1 and +1

(a)  

Correlation of signifies perfect positive correlation and means that two assets can be expected to move together.

(a)  

Correlation of –1.0 signifies perfect negative correlation, which means that two assets can be expected to move together but in opposite directions.

(a)  

(a)   involves pairing a financial exposure with an instrument or strategy that is negatively correlated to the exposure.

The concept of (a)   - is central to hedging and risk management

The (a)   is a graphical representation of yields for a range of terms to maturity.

(a)   reflect expectations, the yield curve provides useful information about the market’s expectations of future interest rates

(a)   for forward -starting terms can be calculated using the information in the yield curve.

Occasionally, the demand for short term funds increases substantially, and short-term interest rates may rise above the level of longer-term interest rates. This results in an (a)   of the yield curve and a downward slope to its appearance.

(a)   slow the demand for both short-term and long-term funds

suggests forward interest rates are representative of expected future interest rates

(a)  

The shape of the yield curve and the term structure of rates are reflective of the market’s aggregate expectations

(a)  

suggests that investors will choose longer-term maturities if they are provided with additional yield that compensates them for lack of liquidity.

(a)  

supports that forward interest rates possess a liquidity premium and an interest rate expectation component

(a)  

suggests that investors who usually prefer one maturity horizon over another can be convinced to change maturity horizons given an appropriate premium.

(a)  

suggests that different investors have different investment horizons that arise from the nature of their business or as a result of investment restrictions.

(a)  

suggests that exchange rates are in equilibrium when the prices of goods and services (excluding mobility and other issues) in different countries are the same.

(a)  

If local prices increase more than prices in another country for the same product, the local currency would be expected to decline in value vis-à-vis its foreign counterpart.

(a)  

The (a)   approach suggests that exchange rates result from trade and capital transactions that, in turn, affect the balance of payments.

The equilibrium exchange rate is reached when both internal and external pressures are in equilibrium

(a)  

The (a)   is reached when both internal and external pressures are in equilibrium

The (a)   suggests that exchange rates are determined by a balance between the supply of, and demand for, money.

When the money supply in one country increases compared with its trading partners, prices should rise and the currency should depreciate.

(a)  

The (a)   - suggests that currency holdings by foreign investors are chosen based on factors such as real interest rates, as compared with other countries.

(a)   -have existed in small villages and larger cities for centuries, allowing farmers to trade their products for other items of value

used to specify future delivery (12th century medieval trade).

(a)  

trading in prized tulip bulbs in 17th century Amsterdam

(a)  

rice dealers could sell futures in advance of a harvest in anticipation of lower prices

(a)  

first organized futures exchange in the United States. Its business was non-standardized grain forward contracts.

(a)  

introduced the first energy futures contract with heating oil futures.

(a)  

– first automated exchange in 1984

(a)  

- brought the development of new derivatives products, such as weather and catastrophe contracts, as well as a broader acceptance of their use.

(a)  

Euro was adopted by Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain, and two years later, Greece. The move to a common currency significantly reduced foreign exchange risk for organizations doing business in Europe.

(a)  

- technology stocks reached a final spectacular top

(a)  

changed many perspectives on risk • New risk modeling capabilities and trading in derivatives

(a)  

is the probability of an adverse impact on profitability or asset value as a result of interest rate changes.

(a)  

floating interest rate debt is exposed to rising interest rates that could increase the company’s cost of fund

(a)  

portfolio of fixed income securities has exposure to interest rates through both changes in yield and gains or losses on assets held

(a)  

Refers to the possibility of a directional, or up or down, change in interest rates. Most organizations monitor absolute interest rate risk in their risk assessments due to both its visibility and its potential for affecting profitability.

(a)  

The (a)   the duration, the greater the impact of an interest rate change.

(a)   results from changes in the relationship between short- and long-term interest rates.

longer-term interest rates are higher than shorter-term interest rates due to higher risk to the lender

(a)  

In an (a)   environment, demand for short-term funds pushes short-term rates above long-term rates.

When the (a)   , interest rates for longer maturities increase more than interest rates for shorter terms as demand for longer-term financing increases,

A (a)   results in a greater interest rate differential between short-term and long-term interest rates, which makes rolling debt forward more expensive.

A (a)   has a smaller gap between long and short-term interest rates. This may occur as longer term rates drop while short-term rates remain about the same.

makes rolling debt forward cheaper because there is a smaller interest rate differential between maturity dates.

(a)  

is the risk that a hedge, such as a derivatives contract, does not move with the direction or magnitude to offset the underlying exposure, and it is a concern whenever there is a mismatch.

(a)  

When interest rates at investment maturities (or debt maturities) result in funds being reinvested (or refinanced) at current market rates that are worse than forecast or anticipated.

(a)  

It arises from the ordinary transactions of an organization, including purchases from suppliers and vendors, contractual payments in other currencies, royalties or license fees, and sales to customers in currencies other than the domestic one.

(a)  

(a)   referred to fluctuations that result from the accounting translation of financial statements, particularly assets and liabilities on the balance sheet.

Strategic or economic exposure affects an organization’s competitive position as a result of change in exchange rates.

(a)  

(a)   such as declining sales from international customers, do not show up on the balance sheet, though their impact appears in income statements.

Exposure to absolute price changes is the risk of commodity prices rising or falling.

(a)  

Organizations that produce or purchase commodities, or whose livelihood is otherwise related to commodity prices, have exposure to

(a)  

occurs when there is potential for changes in the price of a commodity that must be purchased or sold.

(a)  

(a)   can also arise from non-commodity business if inputs or products and services have a commodity component.

Organizations have exposure to quantity risk through the demand for commodity assets

(a)  

remains a risk with commodities since supply and demand are critical with physical commodities.

(a)  

In a (a)   -, the price of a commodity for future delivery is higher than the cash or spot price. The higher forward price accommodates the cost of owning the commodity from the trade date to the delivery date, including financing, insurance, and storage costs.

When demand for cash or near-term delivery of a commodity exceeds supply, or there are supply problems, an (a)   may result. Market participants bid up prices for immediate available supply, and prices

The (a)   is the difference between the cash or spot price and the futures or forward price at any point in time.

The basis is the difference between the cash or spot price and the futures or forward price at any point in time.

(a)  

In the commodities markets, (a)   can also refer to differences due to the specifics of a particular commodity, such as its delivery point or local quality

With notable exceptions such as electricity, commodities involve issues such as quality, delivery location, transportation, spoilage, shortages, and storability, and these issues affect price and trading activity.

(a)  

(a)   is a concern when an organization is owed money or must rely on another organization to make a payment to it or on its behalf.

Credit risk (a)   as time to expiry, time to settlement, or time to maturity increase.

Credit risk that arises from exposure to a counterparty, such as in a derivatives transaction, is often known as (a)  

(a)   arises from money owed, either through lending or investment, that the borrower is unable or unwilling to repay.

The amount at risk is the defaulted amount, less any amount that can be recovered from the borrower.

(a)  

(a)   - arises from the fact that if the counterparty defaults or otherwise does not fulfill its obligations under the terms of a contractual agreement, it might be necessary to enter into a replacement contract at far less favorable prices

(a)   arises at the time that payments associated with a contract occur, particularly cross payments between counterparties

It has the potential to result in large losses because the entire amount of the payment between counterparties may be at risk if a counterparty fails during the settlement process

(a)  

encompasses the legal, regulatory, and political exposures that affect international transactions and the movement of funds across borders.

(a)  

It arises through the actions of foreign governments and countries and can often result in significant financial volatility.

(a)  

is a source of credit risk that applies to organizations with credit exposure in concentrated sectors

(a)  

The risk that a counterparty is not legally permitted or able to enter into transactions, particularly derivatives transactions, is known as (a)  

most business transactions involve human decision making and relationships.

(a)  

risk of adverse consequences as the result of missing or ineffective processes, procedures, controls, or checks and balances.

(a)  

incorporates the operational risks arising from technology and systems that support the processes and transactions of an organization

(a)  

– Firms may have equity exposure where the return depends on a stream of dividends and favorable equity price movements to provide capital gains.

(a)  

financial capacity to meet its short-term obligations or maintain its day-to-day operations.

(a)  

granted to securities holders or contract participants and provide them with certain rights.

(a)  

risk that the failure of a major financial institution could trigger a domino effect and many subsequent organizational failures, threatening the integrity of the financial system.

(a)  

risk that the failure of a major financial institution could trigger a domino effect and many subsequent organizational failures, threatening the integrity of the financial system.

(a)  

a (a)   for each currency assists in identifying currency exposures

When an organization has foreign currency cash inflows and outflows, a cash forecast for each currency assists in identifying currency exposures. enable the user to determine a balance for each currency and whether there is a cumulative deficit or excess currency over time based on reasonably certain cashflows.

(a)  

a strategy that introduces basis risk intentionally

(a)  

Lower foreign interest rates might be seen as a way to reduce funding costs. (a)   may be required to finance an overseas expansion or investment in foreign plant and operations.

Changes may be made to pricing methodology to better reflect exchange rates. In some industries, surcharges help to offset exchange rate risk and pass it on to the final customer.

(a)  

Hedging foreign exchange exposure with derivatives such as (a)   replaces exposure to exchange rates with exposure to the performance of contractual counterparties

A (a)   is a customized contract that locks in an exchange rate for the purchase or sale of a predetermined amount of currency at a future delivery date.

a contract to buy one currency is a contract to (a)   the other currency

Forwards trade in the over-the-counter market, and the forward price includes a profit for the dealer.

(a)  

The (a)   reflects the difference in interest rates between the two currencies over the period of time covered by the forward.

This is useful for organizations that find it difficult to forecast a specific date for a forward

(a)  

Contractual agreements where delivery of the currency does not occur

(a)  

(a)   tend to have shorter terms to maturity and have only two exchanges between counterparties.

(a)   tend to cover longer periods and involve multiple exchanges between counterparties.

Used extensively by financial institutions to manage cash balances and exposures in various currencies

(a)  

(a)   consists of a spot transaction and forward transaction.

(a)   enable swap counterparties to exchange payments in different currencies, changing the effective nature of an asset or liability without altering the underlying exposure.

(a)   usually have periodic payments between the counterparties for the term of the swap and cover a longer period of time than foreign exchange swaps.

A (a)   might be useful for a company that has issued long-term foreign currency debt to finance capital expenditures.

A (a)   is similar to a loan combined with an investment.

(a)   are exchange-traded forward contracts to buy or sell a predetermined amount of currency on a future delivery date.

Margin is a performance bond, required by both buyers and sellers, to ensure their performance to the contract.

(a)  

Purchase of options can reduce the risk of an adverse currency movement, while maintaining the ability to profit from favorable exchange rate changes

(a)  

(a)   can be used to produce option premium income, though not providing a hedge.

A (a)   gives the option buyer the right to sell the underlying currency at the strike rate. When exercised, the option seller has the obligation to accept the currency at the strike rate.

A (a)   gives its buyer the right to purchase the underlying currency at the strike rate. When exercised, the option seller has the obligation to deliver the currency at the strike rate

(a)   cost less than American-style options because there is less opportunity for them to be exercised.

The relationship between the strike rate and current exchange rate helps to determine (a)   and how much the option’s value will respond to exchange rate changes.

An (a)   option permits the option holder to exercise it at a rate equivalent to current market rates (usually the forward rate).

An (a)   option has a strike rate that is more favorable exchange than current rates.

An (a)   option has a strike rate that is worse than current exchange rates. The out-of-the-money option’s value is based on the probability of it being in-the-money before expiry.

An (a)   achieves protection against adverse exchange rates beyond the strike rate.

Sale of options entails significantly more risk than the purchase of options. The seller receives option premium and is obligated to the terms of the option.

(a)  

A collar combines the purchase of a call option and the sale of a put option with the same expiry date on the same currency pair

(a)  

(a)   have a payoff that depends on the average exchange rate over the option’s term to expiry.

the (a)   is calculated from the periodic fixings made during the term and compared with the strike price

(a)   are a type of exotic option in which payout depends on whether the option has reached or exceeded a pre-determined barrier price.

(a)   are options on options. Normally Europeanstyle, they give the option buyer the right, but not the obligation, to buy or sell an option contract at the compound option’s expiry date at a predetermined option premium.

(a)   are options on options. Normally Europeanstyle, they give the option buyer the right, but not the obligation, to buy or sell an option contract at the compound option’s expiry date at a predetermined option premium.