FINS3630 Lecture Notes - Lecture 1: Foreign Exchange Risk, Interest Rate Risk, Liquidity Risk
FINS3630 notes
Lecture 1: Interest rate risk, individual loan risk, loan portfolio risk, foreign exchange risk,
market risk, sovereign risk and liquidity risk, liquidity risk, capital adequacy, securitisation
Why financial institutions?
- Households vs. firms (labour and capital)
- Problems w flow of funds: monitoring, maturity mismatch, transaction costs,
liquidity, price risk (mitigated through financial institutions)
- Monitoring: agency problem (get money back) → high cost of information collection,
high chance of default can’t price this risk
o AT: FI bears risk of default (reduces equity)
o Broker: information provision low cost
- Maturity mismatch: liquid investment vs. LT loans (maturity conflict of interest)
o AT: FI provide ST, liquid investm opp for investor + LT bank loans to firms
- Transaction costs: process (large FV, trading partner, information)
o Broker: overcome size constraints and reduce transaction costs (spread), find
counterparty and cheaper info
- Liquidity risk: direct investm illiquid (bid-ask spreads higher for assets sold/bought in
small quantities vs. large quantities move market price)
o Brokers: facilitated buy/sell of shares
o AT: diversify withdrawal needs and liquid offerings
- Price risk: diversify, exposure to idiosyncratic shocks
o Broker: diversify and managed portfolios
o AT: risk free assets
brokers (TS and information)
asset transformer (buy primary and issue liquid secondary)
- Transmission of monetary policy: RBA, money creation through credit cycle
- Credit allocation: credit for real estate, resources for innovation and project
financing
- Time intermediation: wealth accumulation for retirement/life insurance
- Payment services: non-cash payment, clearing
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Lecture 1: interest rate risk, individual loan risk, loan portfolio risk, foreign exchange risk, market risk, sovereign risk and liquidity risk, liquidity risk, capital adequacy, securitisation. Problems w flow of funds: monitoring, maturity mismatch, transaction costs, liquidity, price risk (mitigated through financial institutions) Monitoring: agency problem (get money back) high cost of information collection, high chance of default (cid:894)can"t price this risk(cid:895: at: fi bears risk of default (reduces equity, broker: information provision low cost. Maturity mismatch: liquid investment vs. lt loans (maturity conflict of interest: at: fi provide st, liquid investm opp for investor + lt bank loans to firms. Transaction costs: process (large fv, trading partner, information: broker: overcome size constraints and reduce transaction costs (spread), find counterparty and cheaper info. Liquidity risk: direct investm illiquid (bid-ask spreads higher for assets sold/bought in small quantities vs. large quantities move market price: brokers: facilitated buy/sell of shares, at: diversify withdrawal needs and liquid offerings.
