Question

In: Finance

Which firm from each pair would you expect to have greater market risk? Explain your choce....

Which firm from each pair would you expect to have greater market risk? Explain your choce.

a) General steel or general food supplies

b) Exotic world tours agency or general cinemas.

Solutions

Expert Solution

Market Risk- It is the systematic risk that affect overall financial markets. This risk cannot be controlled and cannot be minimized through diversification. It can be only reduced through Hedging. Some companies are directly exposed to market risk.

Elements of Market risk- Are as following-

  1. Earthquake
  2. Recession
  3. Terrorist attack
  4. Political changes

Answer(a):General steel has greater market risk than General food supplies because general steel produces steel and steel prices get affected by international prices of steel. China is the biggest exporter of steel so steel prices are affected by the demand, supply, production and other factors in China that further affects the prices of steel in international market. General food supplies is less risky than General steel as they buy raw material from the domestic market.

Answer(b): Exotic world tours agency has greater market risk than general cinemas. World tour agency has greater risk of exchange rate fluctuations and sometimes season affects the prices. When it is peak season, holiday season, World tour agencies do well and get many customers while they do not have customer base off season.

As far as General cinema is concerned, it has movie theatre chain in USA. There is always demand of movies in USA. people of each age want to see movies and it is not directly exposed to market risk.

jeff jeffy answered 2 years ago
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