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Asset Quality
Management Capability
Earnings
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Money
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Risk
FOREIGN EXCHANGE RISK
Exposure to an unanticipated changes in exchange
rates between currencies.
TYPES OF FOREIGN EXCHANGE EXPOSURE
Translation/Accounting Exposure forex exposure
resulting to change in value of Assets and Liabilities
as reflected in the financial statements (foreign
currency denominated securities).
Transaction/Contractual Exposure forex
exposure as a result of contractual obligations in
another currency (ex. imports, exports).
Operating/Economic Exposure forex exposure
that affects the companys earnings and future cash
flows (ex. offshore revenues paid in foreign currency).
EQUITY PRICE RISK
The risk of loss as a result of volatility in
equity prices.
Measured by the standard deviation of the
price of equities over a certain period.
COMMODITY PRICE RISK
The threat that a change in the price of a production
input will adversely impact a producer who uses that
input. Commodity production inputs include raw
materials like cotton, corn, wheat, oil, sugar, soybeans,
copper, aluminum and steel.
Factors that can affect commodity prices include
political and regulatory changes, seasonal variations,
weather, technology and market conditions.
Commodity price risk is often hedged by major
consumers.
LIQUIDITY RISK
The current and prospective risk to earnings or
capital arising from a financial institutions inability to
meet its obligations when they come due without
incurring unacceptable losses or costs.
Ability of an entity to pay its short-term obligations.
CAUSES OF LIQUIDITY RISKS
No demand for the asset in the market
Volume of asset that needs to be sold
Asset A
x
Asset B
y
TYPES OF CONCENTRATION RISK
Country Concentration
Credit Concentration
Supplier Concentration
Customer Concentration
COUNTRY CONCENTRATION
Concentration risk associated with having a
significant exposure in a single or few countries.
CREDIT CONCENTRATION
The potential of a significant
loss that threatens a lenders
core operations associated a
large exposure to a single or
few borrowers.
Single Borrowers Limit
(SBL) restriction set by the
BSP which limits a bank from
granting loans to a single
entity to a maximum amount
of 25% of its capital.
SUPPLIER CONCENTRATION
Risk associated with having a single or few suppliers.
Results to a high bargaining power of suppliers.
CUSTOMER CONCENTRATION
Risk associated with having a highly concentrated
customer base.
Results to a high bargaining power of customers.
CASE LIAM MCNULTY
Liam McNulty is the risk manager for a large multinational
agricultural concern, Agripure. The company grows its own
corn, wheat, and soybeans but pays large sums of third
parties for pesticides, fertilizer, and other supplies. For this,
it must borrow heavily to finance its purchases. Customers
typically purchase Agripures goods on credit. Moreover,
Agripure buys and sells its products and raw materials
worldwide, often transacting in the domestic currency of its
customers and suppliers. Finally, to finance its own
expansion, Agripure intends to issue stock.