BUS-F 446 Lecture Notes - Lecture 2: Fire Sale, Wrinkle, Federal Funds
Document Summary
Class on 1/29/14: chapters 7, 8, & 9. Interest rate risk is the single most important: mismatch between durations of assets and liabilities, risks associated with changes in market prices, long-term capital management (ltcm) (company) Strategy focused on credit spreads in emerging markets. Russian spreads got really wide, kept widening, russia defaulted, and ltcm went bankrupt! Credit risk: based on counterparty"s likelihood of default, how do changes in default likelihood impact prices, it"s really based on changes of default probabilities. Foreign exchange risk: international trade keeps growing as % of gdp, must have diversified exposure. Country risk: country defaults on payments its government promises. Liquidity risk: definition one: a fire sale , also, bid-ask spread related. Insolvency risk: fis have regulated amounts of capital, below a certain level they"re considered insolvent . Event risk: for random and unanticipated events. Chapter 8: interest rate risk i, repricing and maturity models. Measuring interest rate risk; models: repricing, maturity, duration.
