BEO2000 Lecture Notes - Lecture 10: Reputational Risk, Reinvestment Risk, Interest Rate Risk

• School: Victoria University
• Department: BEO
• Course: BEO2000
• Professor: Dennis Allen

Document Summary

Lecture 10: risks of financial institutions: beo2000 financial institutions & monetary theory, primary source, with respect to learning outcomes, you should be able to, b. Increased returns often come at the cost of increased risk, which comes in many forms: Insolvency risk: risks at financial institutions. Financial institution (fi) risk has increased due to interconnectedness of the global market. Overseas market conditions can impact local fis. Exposure to risk has two main sources: Need to understand risk in order to manage the risks one is exposed to: credit risk, credit risk: The risk that the promised cash flows from loans and securities held by fis may not be paid in full. Classification of risk via credit rating agencies. Specialise in rating default risk of loans, equity and bonds. Rank them in accordance to highest to lowest. Limit the probabilities of the bad outcomes in the portfolio.