Discuss and explain the basic risks faced by financial intermediaries. (Risks are in image attached) Type of RisksInterest Rate/ Market Value (Price Risk)Asset transformation - When a Fl or business buy one asset and transform this asset into another asset that theysell..Interest rate or market value/price risk is the the risk that the market value (price) of an asset will decline(when interestrate rises), resulting in a capital loss when sold.• Reinvestment/Refinancing RiskReinvestment risk - The risk that earnings from a financial asset need to be reinvested in lower-yielding assets orinvestment because interest rates have fallen.Refinancing risk – risk that cost of rolling over or re-borrowing funds could be more than the return earned on assetinvestments.Credit riskCredit risk, also called default risk, is the risk associated with a borrower going into default (not making payments aspromised).FINNO1H Basic Finance and Accounting/ MACarandang1Investor losses include lost principal and interest, decreased cash flow, and increased collection costs. An investor canalso assume credit risk through direct or indirect use of leverage.For example, an investor may purchase an investment using margin. Or an investment may directly or indirectly use orrely on repo, forward commitment, or derivative instruments.Inflation/Purchasing Power RiskThe risk of increase in value of goods and services reducing the purchasing power of the currency.Political RiskThe risk that government laws or regulations bring to the investors expected return on investment adversely ornegatively.Technology/Operation RiskArises when investment in technology do not produce the desired result i.e. fail to get more customers, unable toproduce economies of scale, fail to increase profit, or reduce costs.Asset-backed riskRisk that the changes in one or more assets that support an asset-backed security will significantly impact the value ofthe supported security. Risks include interest rate, term modification, and prepayment risk.Foreign investment riskRisk of rapid and extreme changes in value due to:1.smaller markets;2.differing accounting, reporting, or auditing standards;3.CONnationalization, expropriation or confiscatory taxation;4. economic conflict;political or diplomatic changes.6.5.Valuation, liquidity, and regulatory issues may also add to foreign investment risk.Liquidity riskThis is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or makethe required profit).Results from withdrawal of funds by investors or exercise of loan rights or credit lines of clients."bank run" – when bank depositors all demand withdrawals of their funds deposit with a certain bank at the same time,it will cause a "bank run"There are two types of liquidity risk:Asset liquidity risk - An asset cannot be sold due to lack of liquidity in the market - essentially a sub-set of marketrisk.Funding liquidity risk - Risk that liabilities:Cannot be met when they fall dueCan only be met at an uneconomic priceCan be name-specific or systemicMarket riskThe four standard market risk factors are :1. equity risk,2. interest rate risk,currency risk, and4. commodity risk:Equity risk is the risk that stock prices in general (not related to a particular company or industry) or the impliedvolatility will change.6.3.Interest rate risk is the risk that interest rates or the implied volatility will change.7. Currency risk is the risk that foreign exchange rates or the implied volatility will change, which affects, for example,the value of an asset held in that currency.8. Commodity risk is the risk that commodity prices (e.g. corn, copper, crude oil) or implied volatility will change.

Question

Discuss and explain the basic risks faced by financial intermediaries. (Risks are in image attached) Type of RisksInterest Rate/ Market Value (Price Risk)Asset transformation - When a Fl or business buy one asset and transform this asset into another asset that theysell..Interest rate or market value/price risk is the the risk that the market value (price) of an asset will decline(when interestrate rises), resulting in a capital loss when sold.• Reinvestment/Refinancing RiskReinvestment risk - The risk that earnings from a financial asset need to be reinvested in lower-yielding assets orinvestment because interest rates have fallen.Refinancing risk – risk that cost of rolling over or re-borrowing funds could be more than the return earned on assetinvestments.Credit riskCredit risk, also called default risk, is the risk associated with a borrower going into default (not making payments aspromised).FINNO1H Basic Finance and Accounting/ MACarandang1Investor losses include lost principal and interest, decreased cash flow, and increased collection costs. An investor canalso assume credit risk through direct or indirect use of leverage.For example, an investor may purchase an investment using margin. Or an investment may directly or indirectly use orrely on repo, forward commitment, or derivative instruments.Inflation/Purchasing Power RiskThe risk of increase in value of goods and services reducing the purchasing power of the currency.Political RiskThe risk that government laws or regulations bring to the investors expected return on investment adversely ornegatively.Technology/Operation RiskArises when investment in technology do not produce the desired result i.e. fail to get more customers, unable toproduce economies of scale, fail to increase profit, or reduce costs.Asset-backed riskRisk that the changes in one or more assets that support an asset-backed security will significantly impact the value ofthe supported security. Risks include interest rate, term modification, and prepayment risk.Foreign investment riskRisk of rapid and extreme changes in value due to:1.smaller markets;2.differing accounting, reporting, or auditing standards;3.CONnationalization, expropriation or confiscatory taxation;4. economic conflict;political or diplomatic changes.6.5.Valuation, liquidity, and regulatory issues may also add to foreign investment risk.Liquidity riskThis is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or makethe required profit).Results from withdrawal of funds by investors or exercise of loan rights or credit lines of clients.&#34;bank run&#34; – when bank depositors all demand withdrawals of their funds deposit with a certain bank at the same time,it will cause a &#34;bank run&#34;There are two types of liquidity risk:Asset liquidity risk - An asset cannot be sold due to lack of liquidity in the market - essentially a sub-set of marketrisk.Funding liquidity risk - Risk that liabilities:Cannot be met when they fall dueCan only be met at an uneconomic priceCan be name-specific or systemicMarket riskThe four standard market risk factors are :1. equity risk,2. interest rate risk,currency risk, and4. commodity risk:Equity risk is the risk that stock prices in general (not related to a particular company or industry) or the impliedvolatility will change.6.3.Interest rate risk is the risk that interest rates or the implied volatility will change.7. Currency risk is the risk that foreign exchange rates or the implied volatility will change, which affects, for example,the value of an asset held in that currency.8. Commodity risk is the risk that commodity prices (e.g. corn, copper, crude oil) or implied volatility will change.

Accepted Answer

Risk management can be said as the process of identifying and analyzing along with controlling the…