Assignment # 1

Theory of Risk Management

Develop the scenario of financial transaction which reflects at least five types of risk and discuss their interrelation as well.

Submitted by: ADNAN SAJID Id # 12003096-008 MS_ Finance Submitted To: MR. TAHSEEN MOHSIN
Dated 30-03-2013 (Batch 03)

UNIVERSITY OF MANAGEMENT AND TECHNOLOGY

scenario
Suppose a simple transaction is that a businessman purchases 1 million of spot from Burj Bank, Dubai Branch. The current rate is $1.4, for settlement in three business days. So, our bank will have to deliver $1.4 million in three days in exchange for receiving $ 1 million. The simple transaction involves a series of risks. Required:
Discuss briefly five types of risk effecting on this financial transaction given the strategy to be used by Burj Bank, explain how its exposure to exchange rate risk may have changed.

Risk Factors
Risks Involves in an organization Senario. These are five risk factors as below that affects organizations profitability.

1. Market Risk : On the same date if the spot rate change to $1.3. Bank cut the position and writes spot sale with another Bank thats name is Dubai Islamic Bank. The 1 million is now worth only $ 1.3 million. The loss of $100,000 is the change in market value of investment. So this kind of risk shown as market risk. 2. Credit Risk: After one day, Dubai Islamic Bank goes bankrupt. So Burj Bank must now enter a new, replacement trade with Third Bank. If the spot rate further dropped $1.40/ to $1.35/, the gain of $50,000 on spot sale from Bank B is now at risk. The loss is the change in market value of investment, if positive. Thus there is interaction between credit and market risk. 3. Settlement Risk: Suppose the third bank is situated any other country. And firstly he promise to pay the amount but later on the countra party does not fulfill his promises thats make the sense of settlement Risk.

4. Financial Risk: These are the risks associated with the financial structure and transactions of the particular industry.
5. Operational Risk: If Banks employee make wrong entry and Banks find the operations misunderstanding thats make the sense of operational risk. Operation risk is totally on operation based.