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Chp 11: Risk Management (HOW to manage risks (Pg 216) (Retention, Control…
Chp 11: Risk Management
Estimating
future foreign exchange rates
(Pg 220)
Purchasing power parity theory
(difference in inflation rate)
Interest rate parity theory
(difference in interest rate causes diff '/, spot and forward rate)
Expectations theory
(forward rate - rate that bank offers)
HOW to manage risks
(Pg 216)
Retention
Control
Avoidance
Transfer
TYPES of foreign exchange rate risk
(Pg 218)
Economic risk (LT)
Translation risk
Transaction risk (ST)
HEDGING
foreign currency movements
Internal
(Pg 219)
Leading & Lagging - paying early/ late
Matching receipts and payments in the same foreign currency
Home currency invoice billing
Multilateral Netting/ Netting centre
External
Over The Counter
(customized, with bank)
Money market hedge (Pg 229)
Currency swaps (pg 249)
FORWARD
contract (Pg 226)
OTC currency
OPTIONS
(Pg 240)
Exchange Traded
(standardized)
Currency
FUTURES
(Pg 234)
ET currency
OPTIONS
(Pg 244)
Assessing interest rate risk
(Pg 256)
Gapping
(Rate sensitive Assets - Rate sensitive Liabilities)
Duration
(how long until holder of bond receives cash payment,
require CERTAIN cash flow)
HEDGING
interest rate movements
Internal
(Pg 259)
Interest matching
(match interest on asset & liab)
Smoothing
(combine fixed and floating rate liab)
External
OTC
Interest rate
SWAP
(pg 264)
CAP
or
FLOOR
option (pg 261)/
Interest rate
COLLAR
(Pg 263)
FORWARD
rate agreement (Pg 260)
ET
Interest rate
FUTURES
(Pg 274)
Interest rate
OPTIONS
(Pg 280)
Exchange rate risk
Interest rate risk