This website uses cookies to ensure you have the best experience. Learn more

Financial Risk Management Assignment

2345 words - 10 pages



(a) The type of mortgage-related default risk (systematic or non-systematic) depends on the reason of default. Reasons of default such as unanticipated increase in interest rates, and falling home prices make the default risk systematic. As these factors affect the financial industry as a whole and are present everywhere, they cannot be diversified away, but can be hedged.

On the other hand, reasons of default that are borrower-focused such as loss of job, occupational disability, and finance mismanagement make default risk non-systematic. This is because stricter underwriting processes and the borrowers’ insurance policies can reduce default risks triggered by these ...view middle of the document...

By issuing MBS to raise funds, the mortgage lender has created a secondary market that is substantially more liquid than one based on individual mortgage loans. This raises more capital and allows the lender to issue more mortgage loans. As the mortgage pool increases in size, it becomes more diversified. Non-systematic default risks will decrease and the MBS becomes more attractive and will sell more. The higher volume will compensate for lower interest profits the lender had to sacrifice initially.

Therefore, by issuing MBS, the lender can achieve the same or even higher profit levels without issuing MBS, but without exposure to default risk (transferred to investors).


Instead of pooling all mortgages together to form one Mortgage-Backed Security, the lender can classify mortgages according their maturities, risks, and returns and form many Mortgage-Backed Securities. This creates a new bond range from the same mortgage pool that investors can choose from according to characteristics that meet their needs.

For example, three different classes of bonds are created from a 30 year mortgage. Bond A receives prepayments before B and C, while B receives prepayments before C. Since Bond A is expected to mature sooner, it will have a lower interest rate. Investors that require high interest rates can buy Bond C while those looking for short term investments can buy Bond A.

Another variation would be to make Bond A absorb losses before B and C, and B before C. Bond A has the highest risk and would thus be associated with a higher interest rate. Investors who are risk averse would have the choice of lower interest rates for low risk.

As such, the new ‘subsets’ of the Mortgage-Backed Security create a new line of business for the mortgage lender.



The purpose of the Interbank Market is to facilitate trading of currencies, loans, derivative instruments and other financial products between major banks around the world. This market is for banks to trade for themselves and on behalf of investors since they are the only parties that have access to this market.

Unlike stock markets, there is no centralised exchange where trading occurs in the Interbank Market. Instead, it is a network of banks that are interconnected electronically, making trading done over-the-counter. Transactions take place over communication networks such as Bloomberg. Active banks become market makers who create required derivative instruments by demand.


The London Interbank Offered Rate (LIBOR) is the daily interest rates at which participating banks in London offer to lend unsecured funds to other banks in the London Interbank Market. This dynamic information serves as a reference rate or basis to determine variable future interest rates in financial instruments such as interest rate swaps, forward rates agreements and Eurodollar futures.

For example, ‘A’ pays ‘B’ interest payments pegged to LIBOR...

Other Essays Like Financial Risk Management Assignment

Applying Coso Enterprise Risk Management Integrated Framework

1044 words - 5 pages . Relationship to Internal Control Integrated Framework Expands and elaborates on elements of internal control as set out in COSO's control framework. Includes objective setting as a separate component. Objectives are a prerequisite for internal control. Expands the control framework Financial Reporting and Risk Assessment. ERM Roles & Responsibilities Management The board of directors Risk officers Internal auditors

Impact of Low Interest Rates on Financial Institutions

522 words - 3 pages institution (e.g. risk management and/or business strategy).  The first section of your report should discuss the expected effects of low interest rates on the type of financial institution that you have selected (based on theory)  The second part should analyse the effect based on concrete publically available data for the institution that you have selected (e.g. in balance sheet data in financial statements) Format assignment: - 12-15 pages A4

Risk Management


Coca Cola Evaluation

2502 words - 11 pages exposure to risk committees and senior management • To oversee the due diligence team which evaluates the credit applications of business departments and ensure the efficient and sound credit approval process. Commercial banks are predominantly in the risk business. Whilst providing financial services, they face various kinds of financial risks. Market players seek the services of these banks because of their ability to provide funding, market

Diversification in Stock Portfolios

559 words - 3 pages Diversification in Stock Portfolios Assignment # 3 Presented To Dr. James Glenn May 15, 2011 Financial Management- FIN 534-5016 Strayer University Introduction The expected return on stocks is established as the computation for the return of a security based on the average pay off expected where as the volatility of stocks is the standard deviation of a return. The relationship between risk and return is examined by historical

Crg Analysis

2682 words - 11 pages other banks or financial institutions. Credit Risk Grading is an important tool for credit risk management as it helps a Bank to understand various dimensions of risk involved in different credit transactions. The aggregation of such grading across the borrower, activities and the lines of business can provide better assessment of the quality of credit portfolio of a bank or a branch. The credit risk grading system is vital to take decisions

British Petroleum

2344 words - 10 pages / Farrell, J & Hoon, A., 2009, What's Your Company's Risk Culture. Bloomberg Business May 12, 2009 Hall, Russell. 2015, Risk Management Plan, Business 519: Practical Project Risk Management, Dr. Griffin assignment #2 & #3. Hillson, D., Simon, P., 2012, Practical Project Risk Management, Management Concept Press, 8230 Leesburg Pike, Tyson's Corner VA 22182 INTAVER Institute, 2015, Risky Project: project risk Management and Scheduled Risk

Financial Management Report

597 words - 3 pages Financial Management APC308 Individual assignment Weighting – 100% of the marks for this module This is an individual assignment of about 3,000 words. Requirements: You are the senior financial manager in a large listed company, Carr plc. The directors of the company have identified a potential project, which they hope will be successful in increasing the wealth of the shareholders. The project will involve the purchase

Cyber Law

656 words - 3 pages Assignment 2 Chapter 3

 1. Name and Describe two (2) U.S. based compliance laws that exist. 
 Federal Information Security Management Act- This act was passed in 2002 as part of the title 3 of the E-Government Act. Its purpose is to ensure that federal agencies protect their data. It gives specific responsibilities for federal agencies. They are responsible for protecting the system and data, complying with all elements of FISMA and

Assignment 1: Excel Project

1067 words - 5 pages Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). This product also helps in risk management and to build growth within the company. MICROSOFT The Microsoft Corporation develops operating systems for personal computers used all across the world. They have several different divisions within the company that focuses on different areas. The Windows Live division focuses on the PC operating systems that

Risk Management

4131 words - 17 pages . As risk management tools and techniques become more and more complex, however, companies require the services of a Risk Management specialist. A growing specialty in this field, globally, is that of international accounting risk management. International accounting professionals can contribute to the 2 success of their companies must have a strong grasp of financial risk management techniques for multinational and multilateral business

Related Papers

Financial Risk Management 2 Essay

561 words - 3 pages Financial risk management From Wikipedia, the free encyclopedia Financial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk. Other types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks, etc. Similar to general risk management, financial risk management requires identifying its sources, measuring

Value Added Statements; Risk Assessment And Corporate Financial Management

944 words - 4 pages Value Added Statements; Risk Assessment’s Role in Corporate Financial Management This paper will show the benefits of value added statements and argue for their inclusion in U.S. financial reports. The role of risk assessment in financial management will also be discussed. Gary Meek and Sidney Gray (1988) argued that value added statements (VAS) would show profits in a format that would be easily understood and usable by all stakeholders

Unit 7 Assignment 1: Risk Management In A Business Model

4054 words - 17 pages Unit 7 Assignment 1: Risk Management in a Business Model Risk Management in a Business Model Declaration This report entitled the overview of understand the risk management functions in business, understand how business risk is assessed and managed, understand the effects of business risks and how they can be managed and understand approaches to crisis management and business continuity planning. The aim of this assignment is to raise

Is3110 Assignment 1 Application Of Risk Management Techniques

998 words - 4 pages Application of Risk Management Techniques Risks Windows Vista, while relatively current is still a lacking OS when compared to Windows 7. All desktops connect to an industry standard switch via an Ethernet cable. While this can be a risk, it is not a sizable risk. (Minimal Risk) The two large production facilities are connected to the headquarters via an external ISP. Even with the firewalls in place, there is no accountability if the