Finance

Major Assignment FM305

Risk Management and Analysis of Financial Institutions

Financial institutions (FIs) including banks, are in the risk business. In the process of providing financial services FIs assume various kinds of financial risks. Inherent risks facing all FIs can be summarized as follows:

1. Interest Rate Risk is the risk (variability in value) borne by an interest-bearing asset, such as a loan or a bond, due to variability of interest rates. In general, as rates rise, the price of a fixed income bond will fall, and vice versa. Interest rate risk is commonly measured by the bond's duration.

2. Credit Risk arises from loss of principal or loss of a financial reward stemming from a borrower's failure to repay a loan or otherwise meet a contractual obligation. It is closely tied to the potential return on banks investments from variations in yields on assets and liabilities.

3. Market Risk is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors and consequently loss in market values or prices of assets.

4. Foreign Exchange or Currency Risk is the risk of an investment's value changing due to changes in currency exchange rates.

5. Sovereign or Country Risk is a collection of risks associated with investing in a foreign country. These risks include political risk, exchange rate risk, economic risk, sovereign risk and transfer risk, which is the risk of capital being locked up or frozen by government action.

For the purpose of this assignment you are required to obtain an annual report or financial report of a FI and analyze all the above risks. That is, analyze and report how your selected FI is managing these risks. In doing so, you are required to assess the FI’s current practices against the processes and methods discussed in the textbook. Are they following the textbook approach or have they...