say1072016 ‘Types ofRisk - Systematic and Unsystomatc Risk in Finance ‘SUBSCRIBE RSS FEED ARTICLES COMMENTS KALYAN CITY LIFE Search 9 Wi isdom and Vivid Memories of Life HOME DISCLAIMER PRIVACY CONTACT Types of Risk - Systematic and Unsystematic Risk in Finance Post: Gaurav Akrani, Date: 1/25/2012. Comments (3). Labet Finance. Types of risk First lets revise the simple meaning of two words, viz., types and risk. In general and in context ofthis nance article, 1. Types mean different classes or various forms / kinds of something or 2. Risk implies the extend to which any chosen action or an inaction that may lead to a loss or some unwanted outcome, The nation implies that a ‘choice may have an influence on the outcome that exists or has existed However, in financial management, risk relates to any material loss attached to the project that may affect the productivity, tenure, legal issues, et, of the project. In finance, different types of risk can be classified under two main groups, viz, 1. Systematic risk 2. Unsystematic risk, itp malyan-ciy.blogspo.co 4120120 1types-oFrisk-systematic-anat htm ansranozo16 es of Risk Systematic Risk ‘Unsystematic Risk ‘Uncontrotlablebyan organisation -Controllableby an organtsation Macroin nature Micro in nature The meaning of systematic and unsystematic risk in finance: 1. Systematic risk is uncontrollable by an organization and macro in nature. 2. Unsystematic risks controllable by an organization and micro in nature, A. Systematic Risk ‘Systematic risk is due to the influence of external factors on an organization ‘Such factors are normally uncontrollable from an organization's point of view. Itis a macro in nature as it affects a large number of organizations operating under a similar steam or same domain, It cannot be planned by the organization. The types of systematic risk are depicted and listed below. Systematic Risk ‘Uncontrollable by an organisation ‘Macro in nature ——-———— Interest Rate Risk Market Risk: "Tafatlon ation vB 1, Interest rate risk, 2. Market risk and itp malyan-ciy.blogspo.co 4120120 1types-oFrisk-systematic-anat htm ‘Types ofRisk - Systematic and Unsystomatc Risk in Finance TORTI 350 TORTT2,000 ities TDRS4 000 TORES,000 Lazada.co.id 23say1072016 3, Purchasing power or inflationary risk Now let's discuss each risk classified under this group. 1. Interest rate risk Interest-rate risk arises due to variability inthe interest rates from time to time. Itparticularly affects debt securities as they carry the fixed rate of interest The types of interest-rate risk are depicted and listed below. Interest Rate Risk Price Risk Reinvestment Rate Risk 1. Price risk and 2, Reinvestment rat risk ‘The meaning of price and reinvestment rate risk is as follows: 1. Price risk arises due to the possibility that the price of the shares, ‘commodity, Westment, etc, may decline or fal in the future, 2, Reinvestment ate risk results from fact that the interest or dividend ‘earned from an investment can't be reinvested with the same rate of return asitwas acquiring earlier. 2. Market risk Market risk is associated with consistent fluctuations seen in the trading price of any particular shares or securities. That is it arises due to rise or fall in the tsading price of listed shares or securities in the stock market. itp malyan-ciy.blogspo.co 4120120 1types-oFrisk-systematic-anat htm ‘Types ofRisk - Systematic and Unsystomatc Risk in Finance (Ads by Google Risk Matrix Risk Assessment FEATURED 1 To Top. Worlds Top 10 Most Poisonous Venomous Deadliest Snakes Balayam Nall Rubbing Exercise Cures Alopecia, Hair Loss, Bald Whatis Credit Card? 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Volatility risk. ‘The meaning of different tyoes of market risk is as follows: 1. Absolute riskis without any content For e4,, ifa coin is tossed, there is fifty percentage chance of geting a head and vice-versa, 2. Relative riskis the assessment or evaluation of risk at diferent levels of business functions, For e.g. relative-risk from a foreign exchange fluctuation may be higher ifthe maximum sales accounted by an ‘organization are of export sales. 3. Directional risks are those risks where the loss arises from an exposure to the particular assets of a market, For e.g. an investor holding some shares experience a lass when the market price of those shares falls down. 4, Non-Directional risk arises where the method of trading is not ‘consistently followed by the trader. For e.g. the dealer will buy and sell the share simultaneously to mitigate the risk 5, Basis risks due to the possibiliy of loss arising from imperfectly matched risks, For e.. the risks which are in offsetting positions in two related but non-identical markets. itp malyan-ciy.blogspo.co 4120120 1types-oFrisk-systematic-anat htm BI Rp 98.800_| Rp 76.000 Re 39,000 | Rp 111.350 Rp 76.000 _| Rp 99.900 Rp 54.000 _| Rp 79.000 Rp 72.900_| Rp 34.400 Rp 72.590 _| Rp 89.000 Rp 89,000 _|_ Rp 89.000 NEW ARTICLES Management By Objective (#80) - Peter Drucker MBO 1 To Top. 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"Importance In Moder Marketing Sms of advertising and advantages of advertising ansranozo16 ‘Types ofRisk - Systematic and Unsystomatc Risk in Finance 6, Volatiliy risk is of a change in the price of securities as a result of ‘changes in the volatility of a risk-factor. For e.g. it applies to the portfolios of derivative instruments, where the volatility ofits underlying is a major influence of prices. 3. Purchasing power or inflationary risk Purchasing power risk is also known as inflation isk. It's so, since itemanates (originates) from the fact that it affects a purchasing power adversely. It is not desirable to investin securities during an inflationary period, ‘The types of power or inflationary risk are depicted and listed below. Purchasing Power Risk/ Inflationary Risk Demand Inflation Risk Cost Inflation Risk 41.Demand inflation isk and 2. Costinflation risk, ‘The meaning of demand and cost inflation risks as follows: 1. Demand inflation risk arises due to increase in price, which result from ‘an excess of demand over supply, Itoccurs when supply falls to cope with the demand and hence cannot expand anymore. In other words, demand inflation ocours when production factors are under maximum utilization, 2. Cost inflation risk arises due to sustained increase in the prices of goods land services. Itis actually caused by higher production cost. A high cost of production inflates the final price of finished gaods consumed by people. B. Unsystematic Risk itp malyan-ciy.blogspo.co 4120120 1types-oFrisk-systematic-anat htm Importance of Marketing Research to Government Quality Control Total Quali Management TOM Quality Cit Fayol's Principle of Division of Work-Meaning, Example, Explanation Principles of Good Layout for an ‘Advertisement Copy Basic Assumptions of Law of Demand FINANCE Whatis Finance? Meaning Definition Features of Finance Whatis Financial Planning? 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Unsystematic Risk ‘Controllable by an organisation * Business Risk/ | ** Financial Risk/ |, = “sate: inconent cfsges frikin nae, snes eandcidy rare same. SiSCioit com sts strakn fron Sranaalseanseresenseare sone 1. Business or liquidity risk, 2. Financial or ereditrisk and 3. Operational isk Now let's discuss each risk classified under this group. 1. Business or liquidity risk Business risk is also known as liquidity risk, It is so, since it emanates (originates) from the sale and purchase of securities affected by business cycles, technological changes, etc. The types of business or liquidity risk are depicted and listed below, 1. 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Asset liquidity tisk is due to losses arising from an inability to sell or Business Development pledge assets at, or near, their carrying value when needed. Fore.g. assets, Communication Seite sold ata lesser value than their book value, . Distinguish Between 2, Funding liquidity risk exists for not having an access to the suficient- funds to make payment on time. For e.g, when commitments made to Economies customers are not fulflied as discussed in the SLA (service level Education agreements). Finance Industial Psychology 2. Financial or credit risk avyan cxy Financial skis also known as credit risk. Karises due to change in the capital Management structure of the organization. The capital sincture mainly comprises of three vianacung Resoarea ways by which funds are sourced forthe projects. These are as follows iain Photos 1. Owned funds. Fore. share capital Production Planning 2. Borrowed funds. For eg. loan funds. 3. Retained earings. Fore.g. reserve and surplus, ‘The types of financial or credit risk are depicted and listed below. 1. Exchange rat risk 2. Recovery rate risk, 3. Credit event risk, itp malyan-ciy.blogspo.co 4120120 1types-oFrisk-systematic-anat htm ms.say1072016 ‘Types ofRisk - Systematic and Unsystomatc Risk in Finance 1 To Top. 4, Non-Directional risk, 5. Sovereign risk and 6. Settlement risk. The meaning of types of financial or credit risk is as follows: 1. Exchange rate risk is also called as exposure rate risk. tis a form of financial risk that arises from a potential change seen in the exchange rate ‘of one country’ currency in relation to another county's currency and vice- versa. For e.g. investors or businesses face it either when they have assets ‘or operations across national borders, orifthey have loans or borrowings ina foreign currency. 2. Recovery rate riskis an offen neglacted aspect of a credit-sk analysis. ‘The recovery rate is normally needed to be evaluated, For e.g. the ‘expected recovery rate ofthe funds tendered (given) as a loan to the ‘customers by banks, non-banking financial companies (NBFC), ete. 3. Sovereign risk is associated with the government Here, a goverment is tunable to meets loan obligations, reneging (to break a promise) on loans itguarantees, ete 4. Settlement risk ex'sts when counterparty does not deliver a security or its value in cash as per the agreement of trade or business. 3. Operational risk (Operational risks are the business process risks falling due to human errors. This risk will change from industry to industy. It occurs due to breakdowns in the internal procedures, people, policies and systems, itp malyan-ciy.blogspo.co 4120120 1types-oFrisk-systematic-anat htm anssay1072016 ‘Types ofRisk - Systematic and Unsystomatc Risk in Finance ‘The types of operational risk are depicted and listed below, 1 To Top. Operational Risk rata: | | repent | [ tepinie | | ranatnn 1. Model risk, 2. People risk, 3. Legal risk and 4. Political risk. ‘The meaning of types of operational isk is as follows: 11. Model risk is involved in using various models to value financial securities. is due to probability of loss resulting from the weaknesses in the financial-modol used in assessing and managing a risk. 2. People risk arises when people do not follow the organization's procedures, practices and/or rules. Thatis, they deviate from their expected behavior 3. Legal risk arises when parties are not awfully competent to enter an ‘agreement among themselves, Furthermore, this relates to the regulatory risk, where a transaction could conflict with a government policy or particular legislation (law) might be amended in the future with retrospective effect, 4. Political risk occurs due to changes in government policies. Such ‘changes may have an unfavorable impact on an investor. tis especially prevalent in the third-world counties. C. Conclusion Click on this image to get a complete view of te types of risk in finance. itp malyan-ciy.blogspo.co 4120120 1types-oFrisk-systematic-anat htm ons.say1072016 ‘Types ofRisk - Systematic and Unsystomatc Risk in Finance 1 To Top. Following three statements highlight the gist of his article on risk 1. Every organization must properly group the types of risk under two main broad categories viz. 01. Systematic risk and 02, Unsystematic risk. 2. Systematic risk is uncontrollable, and the organization has to suffer from the same. However, an organization can reduce its impact, to a certain ‘extent, by properly planning the risk attached to the project. 3. Unsystematic risk is controllable, and the organization shall try to mitigate the adverse consequences of the same by proper and prompt planning. ‘So these are some basic types of risk seen in the domain of finance. itp malyan-ciy.blogspo.co 4120120 1types-oFrisk-systematic-anat htm 1013ranozo16 ‘Types ofRisk - Systematic and Unsystomatc Risk in Finance b 70% Wl Related Whatis Finance? Meaning Definition Features of Finance Concept of Risk and Retum in Investment Management itp malyan-ciy.blogspo.co 4120120 1types-oFrisk-systematic-anat htm Need and Importance of Corporate Finance ns.say1072016 ‘Types ofRisk - Systematic and Unsystomatc Risk in Finance ‘+ Typos of Risk - Systematic and Unsystematic Risk in Finance ‘+ Sitemap of Kalyan City Life Blog 3Comments: Anonymous said. December, 2012 at 5:59 PM ‘wowww.. dats really great. never had such a broad n proper knowledge about types of risk. thnks a lot, Anonymous said. February 12, 2013 at 7:00 PM ‘Thisis really awesome,Big thanx to youyou really helped me out from my troubles this is good to recommend to people Idowu Samson said... ‘Api 24, 2014 at 9:20 PM ‘This is indeed informative and edifying. Kindly add some references (textbooks) in your subsequent posts. Thanks Please Comment. itp malyan-ciy.blogspo.co 4120120 1types-oFrisk-systematic-anat htm anssay1072016 Enter your comment... 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