Question

1. Discuss the different types of mortgage loans. Discuss how the mortgage market in Pakistan is different or similar compared to USA.
2. What options does an investor have for managing his investment risk. As a risk manager how would you guide your client about managing his investment risk.

detailed explanation is required

Answer 1

1. There are different type of mortgages loans and they could be-

A. Repayment mortgage-it is repayment of mortgages over each month and it will be including both interest and principal.

B. Interest only mortgages in which repayments will be only consisting of interest payments where as at the end of the period it will be involving principal repayment.

C. Capped rate mortgage in which the interest rate which are to be charged from the mortgage are capped and they cannot exceed the limit.

D. Cashback mortgages are those mortgages in which there is a certain cashback by the party from which you have agreed to take the mortgage.

there are other mortgages like flexible mortgages, tracker mortgages, discount rate mortgages etc.

mortgage market in Pakistan is different from mortgage market in United States because in United States there is high growth of credit and United state is a highly developed economy so mortgage market is very common there and there is a high growth of mortgage market because people often buying their various needs on mortgages so they will be higher growth of the market in United States but in Pakistan it is a newly introduced thing, and the markets are also not developed so it will take time before it is adequately structured in a way to generate credit and the money flow in the economy.

2. Investors have various options when managing the investment risk through derivatives market or he can also take an opposite position so he can be managing his investment risk through taking a forward contract or he can also be managing the investment risk through taking futures and options and mostly investment are meant to be done with the goal of capital appreciation so they will be trying to hedge their risk of downside through taking a put option or they can also enter into shorting the contracts.

Management of investment risk can be also done through active management of the portfolio and reshuffling of the portfolio according to the needs of the market and diversification of portfolio in optimum asset according to different market cycles.