BU353 Chapter Notes - Chapter 1: Interest Rate Risk, Credit Risk, Cash Flow
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Risk any situation where there is uncertainty about what outcome will occur. Unexpected changes in expected future cash flows are a major source of fluctuations in business value a) hazard pose a threat to life, health, property or the environment (also called pure risk) Ex. fire and property damage, windstorms, theft/crime/personal injury, business interruption, disease/disability, liability claims b) financial uncertainty over the magnitude of cash flows due to possible changes in prices, asset values, exchange rates, liquidity and credit risk. Price risk possible changes in output/input prices. Output price risk risk of changes in the prices a firm can demand for goods/services. Input price risk risk of changes in prices firm pays for labour and materials. Three types of price risk are commodity price risk, exchange rate risk, and interest rate risk. Credit risk risk that a fir(cid:373)"s (cid:272)usto(cid:373)ers a(cid:374)d the parties to (cid:449)hi(cid:272)h it has le(cid:374)t money will delay or fail to make promised payments (ex.
