Identify sources of risk & why investors should be concerned with them

Various sources of risk are discussed below:-

Interest Rate Risk: -This risk occurs because  cash flow characteristics behavior  of short-term deposits react differently to changes in market interest rates than the cash flow behavior of long-term assets.  Investor should be concerned of this risk because it can effect on prices (value) of interim cash flows (interest coupon payment) .When interest rates rise, the cost of liabilities increases , but the income from assets increases  as well. The total effect on bank profits will depend on whether the rate-sensitive assets outnumber the rate-sensitive liabilities.

Market Risk:-It is also known as economic risk. It occurs due to changes in economic or market conditions. Investors should be concerned regarding it because  the change in market value of the assets can be much different from the change in market value of the liabilities and can lead to losses .

Foreign Exchange Risk: - Foreign exchange risk involves the adverse affect on the value of an investor's  assets and liabilities that are located in another country when the exchange rate changes.  Investors should be concerned regarding it because net current exposures are at risk from declining currency values and net liability exposures are at risk from rising currency values .

Liquidity Risk:-Liquidity risk is the uncertainty that an investor may need to obtain large amounts of cash .Investors should be concerned regarding this because it may be the case that investor may need to sell assets at significant losses in order to generate cash quickly.

Insolvency Risk: - Investor should be concerned regarding this risk to avoid risk of  the shortfall of capital by continuous losses .These losses may be the result of one or more of interest rate, market, credit, liquidity, sovereign, foreign exchange risks.

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