What is Liquidity Risk?
In respect to finance, liquidity means that how comfortably the assets (bonds, shares, plant, property, equipment, etc.) can be converted into cash. Thus, by the term ‘liquidity risk’ we can comprehend that a risk that a company or a bank may have to face when it is not able to meet its short-term financial liabilities. Most of the time it happens when the company or a bank is unable to convert a security or a hard asset (property, machinery, equipment, etc.) into cash without the loss of capital or income in the process. There are three kinds of liquidity risks: Funding Liquidity Risk, Trading Liquidity Risk, and Operational Liquidity Risk.
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Total Return Swap
A Total Return Swap (TRS) is a swap agreement in which one party makes payments based on a set rate either fixed or variable while the other party makes payments based on the return of an underlying asset which includes both income which it generates and capital gains. The underlying asset can be a bond, equity, or loan. Banks and other financial institutions use TRS agreements to manage risk exposure with minimal cash outflow. Though TRS has become more popular due to the increased regulatory investigation after it claims the manipulation of credit default swaps (CDS). The asset owner forfeits the risk connected with the asset but absorbs the credit exposure risk that the asset is subjected to. (more…)
What is Foreign Exchange Risk?
Foreign exchange risk refers to the risk that an investment value will change due to change in two different currencies. It is also known as currency risk or exchange rate risk. Exposure to foreign exchange risk is the natural result of the globalization of financial institutions. This risk arises when foreign exchange currency trading and/or foreign asset-liability positions are mismatched in individual currencies. Unexpected volatility could result in significant losses for the firm, which could threaten profitability or even solvency. (more…)
Bid-Ask Spread
The BID price is the price at which the market is willing to buy from us. When we talk about buying and selling Equities or Options on exchange we really don't know to/from whom we are selling/buying from. So we will think about it as the general market. So whenever we want to sell something in the market, the BID price will be the price where we can sell it to the market. (more…)
What is Basis Risk
Basis Risk is a type of systematic risk that arises where perfect hedging is not possible. When there is a variation between hedge/futures price and cash/spot price of the hedged underlying at any given point of time, that variation is called ‘Basis’ and risk associated with it is called Basis Risk. (more…)
What is Cross Hedge?
When the characteristics of the underlying position match perfectly with that of futures contract specifications, it is said as perfect hedge. A hedge that is established with either a mismatched maturity or a mismatched asset or both is referred to as a cross hedge and the risk arising from it will be called as Basis Risk. (more…)
What is Forward Rate Agreement (FRA)?
A Forward Rate Agreement or FRA refers to foreign exchange or interest rate hedging strategy. It is an agreement between two parties who want to protect themselves against future movements in interest rates/changes in the currency exchange rate. Interest rate FRA is a forward contract that gives right and obligation to two parties to agree that a certain interest rate will apply to a principal amount (notional) during a specified future date for specified time. (more…)
Key Companies to try after FRM?
Qualifying FRM opens a plethora of options in your career. The knowledge you gain with the FRM course content will equip you to aim for a lot of companies, even outside the risk profile. Let’s take a look at a few examples to understand this better. Better navigation through profiles must be a target to decide the companies you want to work for. (more…)
What is FRM and it's eligibility?
FRM is the most acclaimed global designation in finance. FRM exam takes place in 165 countries all over the world. FRM is specifically designed for the risk management area in finance. FRM means Financial Risk management. To receive the professional FRM designation, one must complete a comprehensive two-part exam and complete two years of work experience in financial risk management. Professionals who have an FRM designation can participate in optional continued professional development. (more…)