ARM 56- Assignment 9

Exchange rate risk

Uncertainty about an investment's value because of potential changes in the exchange rate between currencies.

In a forward contract

the buyer and seller of a commodity know its price prior to delivery.

Forward contract

A contract that obligates one party to buy and another party to sell a specific financial instrument or physical commodity at a specified future date and price is a

Forward Contract

A contract that obligates one party to buy and another party to sell a specific financial instrument or physical commodity at a specified future date and price.

A Special Purpose Vehicle

A facility established for the purpose of purchasing income-producing assets from an organization, holding title to them and then using those assets to collateralize securities that will be sold to investors is a special purpose vehicle.

The payment to the seller in an option compensates the seller for

Accepting the risk that it will have to pay cash to the buyer if the value of the underlying asset exceeds the strike price on an exercised option.

Swaps

An agreement between two or more parties to exchange sets of cash flows over a period of time Interest swap and currency swap

Option Contract

An agreement to keep an offer open for a stated period, supported by consideration.

Put Option

An option giving the holder the right to sell a set amount of the underlying security at any time within a specified period.

Call option

An option to buy a set amount of the underlying security at any time within a specified period

Price Risk

The potential for a change in revenue or cost because of an increase or a decrease in the price of a product or an input.

Strike price

The price at which the stock or commodity underlying a call option (such as a warrant) or a put option can be purchased (called) or sold (put) during a specified period

Securitization

The process of creating a marketable investment security based on a financial transaction's expected cash flows.

Securitization

The process of creating a marketable investment security based on the expected cash flows from a financial transaction is securitization.

Interest rate risk

The risk that a security's future value will decline because of changes in interest rates.

Liquidity risk

The risk that an asset cannot be sold on short notice without incurring a loss

Credit Risk

The risk that customers or other creditors will fail to make promised payments as they come due

Market risk

Uncertainty about an investment's future value because of potential changes in the market for that type of investment

Call option benefits

They cap or provide a ceiling for interest rates by giving the holder the right to buy an asset- in some cases, this could be a lower interest rate.