Question

Using a relevant example, detail your understanding of the relationship between risk and the various trade finance instruments.

Answer 1

Risk and return are always having a direct relationship because when there will be a higher risk involved with investment there will be a higher return possibility out of these Investments.

for example,treasury bills which are having a very low risk as they are considered risk free so they will be having a low amount of uncertainty and they will always offer with the low rate of return because they have lower risk.

equities on the other hand will always be have higher risk due to higher amount of uncertainty and no amount of security so there will be a higher volatility in the movement of asset and there will be a higher probability of Return making.

For example, if there is a risk related to complete insolvency of the business and the business has crashed 99% but somebody who has invested after crash and he is expecting the business to revive and not close down, if a business doesn't close down his rate of return will be marvelous so he has taken the highest possible risk because if the business has closed down his entire money would have been lost and he has the possibility of making highest return.