Country financial risk

Similar financial terms

Single country fund
A mutual fund that invests in individual countries outside the United States.

Country economic risk
Developments in a national economy that can affect the outcome of an international financial transaction.

Country beta
Covariance of a national economy's rate of return and the rate of return the world economy divided by the variance of the world economy.

Country risk
General level of political and economic uncertainty in a country affecting the value of loans or investments in that country.

Country selection
A type of active international management that measures the contribution to performance attributable to investing in the better-performing stock markets of the world.

Statement of Financial Accounting Standards No. 52
This is the currency translation standard currently used by U.S. firms. It mandates the use of the current rate method.

Statement of Financial Accounting Standards No. 8
This is a currency translation standard previously in use by U.S. accounting firms.

Short-term financial plan
A financial plan that covers the coming fiscal year.

Pro forma financial statements
Financial statements as adjusted to reflect a projected or planned transaction.

Perfectly competitive financial markets
Markets in which no trader has the power to change the price of goods or services. Perfect capital markets are characterized by the following conditions: a) trading is costless, and access to the financial markets is free, b) information about borrowing and lending opportunities is freely available, c) there are many traders, and no single trader can have a significant impact on market prices.

Notes to the financial statements
A detailed set of notes immediately following the financial statements in an annual report that explain and expand on the information in the financial statements.

Non-financial services
Include such things as freight, insurance, passenger services, and travel.

Long-term financial plan
Financial plan covering two or more years of future operations.

London International Financial Futures Exchange
London International Financial Futures Exchange (LIFFE) is a London exchange where Eurodollar futures as well as futures-style options are traded.

Changes in Financial Position
Sources of funds internally provided from operations that alter a company's cash flow position: depreciation, deferred taxes, other sources, and capital expenditures.

Corporate financial management
The application of financial principals within a corporation to create and maintain value through decision making and proper resource management.

Corporate financial planning
Financial planning conducted by a firm that encompasses preparation of both long- and short-term financial plans.

Financial Institutions Reform (FIRREA)
In August of 1989 the Financial Institutions Reform Recovery and Enforcement Act (FIRREA) was created. FIRREA abolishes the Federal Home Loan Bank Board and FSLIC, switches Savings & Loan regulation to newly created Office of Thrift Supervision. Deposit insurance function shifted to the FDIC. A new entity, the Resolution Trust Corporation is created to resolve the insolvent S&Ls.

Other major provisions of FIRREA include: $50 billion of new borrowing authority, with most financed from ...

Financial Services Authority (FSA)
The Financial Services Authority was created by the incoming UK Labor Government in 1997 as the regulatory body for the whole financial services industry. A number of separate regulatory bodies were brought together into the FSA. The FSA also took over the responsibilities that the Bank of England had for supervising banks and other financial institutions. The Chairman of the FSA is Howard Davies, an ex deputy governor of the Bank, and now a member of the Court of Directors. The Bank and the FSA ...

Financial economies of scale
The ability of large firms to borrow money on more favourable terms than small firms.

Financial intermediaries
Institutions which channel funds from people and institutions wishing to lend to those wishing to borrow.

International Financial and Banking Centre (IFC)
A country identified as being a tax haven.

Interest-rate risk on bonds
The price of a typical bond will change in the opposite direction from a change in interest rates. As interest rates rise, the price of a bond will fall; as interest rates fall, the price of a bond will rise. The actual degree of sensitivity of a bond’s price to changes in market interest rates depends on various characteristics of the issue maturity, coupon and special provisions.

Reinvestment risk on bonds
Usually, when the yield of a bond is calculated, you assume that the coupons received before maturity are reinvested. The additional income from such reinvestment is sometimes referred to as interest-on-interest which depends on the prevailing interest-rate levels at the time of reinvestment. Volatility in the reinvestment rate of a given strategy because of changes in market interest rates is called reinvestment risk. This risk is that the interest rate at which interim cash flows can be reinve ...

Call risk on bonds
Many bonds include a call feature that allows the issuer to redeem or “call” all or part of the issue before the maturity date. The issuer usually retains this right in order to have flexibility to refinance the bond in the future if the market interest rate drops below the coupon rate. This implies three risks from the investor: (a) The cash flow pattern becomes uncertain, (b) The investor becomes exposed to reinvestment risk because the issuer will call the bond when interest rates drop, and ( ...

Default risk on bonds
Issuers that potentially run into cash flow problems, simultaneously attaches default risk to their bonds if there is uncertainty whether they can afford to pay coupons and principals. Bonds with default risk trade in the market at a price that is lower than comparable U.S. Treasury securities, which are considered free of default risk. Default risk is gauged by quality ratings assigned by recognised rating companies such as Moody’s Investor Service, Standard & Poor’s Corporation, Morningstar an ...

Inflation risk on bonds
If investors purchase a bond on which they can realize a coupon rate of 5% but the rate of inflation is 6%, the purchasing power of the cash flow actually has declined. Inflation risk arises because of the variation in the value of cash flows from a security due to inflation, as measured in terms of purchasing power.

Exchange-rate risk on bonds
A non-domestic-currency nominated bond has unknown domestic currency cash flows. The domestic currency cash flows are dependent on the exchange rate at the time the payments are received. For example, suppose that a German investor purchases a bond whose payments are in British pounds (GBP). If pounds depreciate relative to euros (EUR), fewer euros will be received and vice versa. This risk is also referred to currency risk.

Liquidity risk on bonds
The primary measure of liquidity is the size of the bid-ask spread. Liquidity risk depends on the ease with which an issue can be sold at or near its value. It follows that the wider the dealer spread, the more liquidity risk.

Risk arbitrage
The practice of buying the stock of takeover targets after a merger is publicly announced and hold the stock until the deal is officially accomplished.

Systematic risk
The systematic risk of an asset or portfolio is the risk that cannot be diversified away.

Volatility risk
The risk in the value of options portfolios due to the unpredictable changes in the volatility of the underlying asset.

Value-at-Risk
A value-at-risk (VAR) model is a procedure for estimating the probability of portfolio losses exceeding some specified proportion based on a statistical analysis of historical market price trends, correlations, and volatilities.

Unsystematic risk
Also called the diversifiable risk or residual risk. The risk that is unique to a company such as a strike, the outcome of unfavorable litigation, or a natural catastrophe that can be eliminated through diversification.

Unique risk
Also called unsystematic risk or idiosyncratic risk. Specific company risk that can be eliminated through diversification.

Systematic risk principle
Only the systematic portion of risk matters in large, well-diversified portfolios. The expected returns must be related only to systematic risks.

Sovereign risk
The risk that a central bank will impose foreign exchange regulations that will reduce or negate the value of FX contracts. Also refers to the risk of government default on a loan made to it or guaranteed by it.

Shortfall risk
The risk of falling short of any investment target.

Risk-free rate
The rate earned on a riskless asset.

Risk-free asset
An asset whose future return is known today with certainty.

Risk-adjusted return
Return earned on an asset normalized for the amount of risk associated with that asset.

Risky asset
An asset whose future return is uncertain.

Riskless arbitrage
The simultaneous purchase and sale of the same asset to yield a profit.

Riskless rate of return
The rate earned on a riskless asset.

Risk premium approach
The most common approach for tactical asset allocation to determine the relative valuation of asset classes based on expected returns.

Risk premium
The reward for holding the risky market portfolio rather than the risk-free asset. The spread between Treasury and non-Treasury bonds of comparable maturity.

Risk prone
Willing to pay money to transfer risk from others.

Risk neutral
Insensitive to risk.

Risk management
The process of identifying and evaluating risks and selecting and managing techniques to adapt to risk exposures.

Risk lover
A person willing to accept lower expected returns on prospects with higher amounts of risk.

Risk indexes
Categories of risk used to calculate fundamental beta, including (a) market variability, (b) earnings variability, (c) low valuation, (d) immaturity and smallness, (e) growth orientation, and (f) financial risk.

Risk controlled arbitrage
A self-funding, self-hedged series of transactions that generally utilize mortgage securities as the primary assets.

Risk classes
Groups of projects that have approximately the same amount of risk.

Risk averse
A risk-averse investor is one who, when faced with two investments with the same expected return but two different risks, prefers the one with the lower risk.

Risk-adjusted profitability
A probability used to determine a "sure" expected value (sometimes called a certainty equivalent) that would be equivalent to the actual risky expected value.

Risk
Typically defined as the standard deviation of the return on total investment. Degree of uncertainty of return on an asset.

Reverse price risk
A type of mortgage-pipeline risk that occurs when a lender commits to sell loans to an investor at rates prevailing at application but sets the note rates when the borrowers close. The lender is thus exposed to the risk of falling rates.

Reinvestment risk
The risk that proceeds received in the future will have to be reinvested at a lower potential interest rate.

Regulatory pricing risk
Risk that arises when regulators restrict the premium rates that insurance companies can charge.

Rate risk
In banking, the risk that profits may decline or losses occur because a rise in interest rates forces up the cost of funding fixed-rate loans or other fixed-rate assets.

Product risk
A type of mortgage-pipeline risk that occurs when a lender has an unusual loan in production or inventory but does not have a sale commitment at a prearranged price.

Price risk
The risk that the value of a security (or a portfolio) will decline in the future. Or, a type of mortgage-pipeline risk created in the production segment when loan terms are set for the borrower in advance of terms being set for secondary market sale. If the general level of rates rises during the production cycle, the lender may have to sell his originated loans at a discount.

Political risk
Possibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of foreign currency, or other changes in the business climate of a country.

Overnight delivery risk
A risk brought about because differences in time zones between settlement centers require that payment or delivery on one side of a transaction be made without knowing until the next day whether the funds have been received in an account on the other side. Particularly apparent where delivery takes place in Europe for payment in dollars in New York.

Operating risk
The inherent or fundamental risk of a firm, without regard to financial risk. The risk that is created by operating leverage. Also called business risk.

Nonsystematic risk
Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also called unique risk or diversifiable risk. Systematic risk refers to risk factors common to the entire economy.

Nondiversifiable risk
Risk that cannot be eliminated by diversification.

Mortgage-pipeline risk
The risk associated with taking applications from prospective mortgage borrowers who may opt to decline to accept a quoted mortgage rate within a certain grace period.

Market risk
Risk that cannot be diversified away.

Market price of risk
A measure of the extra return, or risk premium, that investors demand to bear risk. The reward-to-risk ratio of the market portfolio.

Liquidity risk
The risk that arises from the difficulty of selling an asset. It can be thought of as the difference between the "true value" of the asset and the likely price, less commissions.

Bankruptcy risk
The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk.

Basis risk
The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for price risk.

Business risk
The risk that the cash flow of an issuer will be impaired because of adverse economic conditions, making it difficult for the issuer to meet its operating expenses.

Call risk
The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.

Commercial risk
The risk that a foreign debtor will be unable to pay its debts because of business events, such as bankruptcy.

Completion risk
The risk that a project will not be brought into operation successfully.

Counterparty risk
The risk that the other party to an agreement will default. In an options contract, the risk to the option buyer that the option writer will not buy or sell the underlying as agreed.

Credit risk
The risk that an issuer of debt securities or a borrower may default on his obligations, or that the payment may not be made on a negotiable instrument.

Cross-border risk
Refers to the volatility of returns on international investments caused by events associated with a particular country as opposed to events associated solely with a particular economic or financial agent.

Currency risk sharing
An agreement by the parties to a transaction to share the currency risk associated with the transaction. The arrangement involves a customized hedge contract embedded in the underlying transaction.

Risk-adjusted return on capital (RAROC)
Measures performance on a risk-adjusted basis. Calculated as the economic return divided by economic capital. RAROC helps determine if a company has the right balance between capital, returns and risk. The central concept in RAROC is economic capital: the amount of capital a company should put aside needed based on the risk it runs.

Equilibrium market price of risk
The slope of the capital market line (CML). Since the CML represents the expected return offered to compensate for a perceived level of risk, each point on the line is a balanced market condition, or equilibrium. The slope of the line determines the additional expected return needed to compensate for a unit change in risk. The equation of the CML is defined by the Capital Asset Pricing Model (CAPM).

Pin Risk
The uncertainty that an option position may be exercised into the underlying instrument. It is risky because it often refers to markets flirting with the prevailing at-the-money level. At such times, the gamma on a position is very erratic and difficult to hedge. Also, there are doubts about the exercise or assignment process. A trader can experience significant changes in net positions due to option exercises.

Risk Capital
Money put up by ordinary shareholders, an individual entrepreneur or venture capitalist that will be lost if the enterprise fails.