Question

The chance of loss because of overall swings in the financial markets does not include: A. market risk. B. interest rate risk. C. liquidity risk. D. expropriation risk.

Answer 1

The swings in the markets are due to various factors. eg. Natural calamity, Terrorist attack, Pandemics or scams or frauds or Political instabilities. The loss due to these reason will can be minimal or huge depending on the impact of the event and to minimize the overall effect of the loss, goverment or financial institutions can intervene with various measures to cushion the loss.

Below are the vrious risks explained. Expropriation risk is the risk that does not include the chance of loss because of overall swings in the financial markets

• Market Risk - This is the risk of loss due to change in the market condition. This is a wide area of risk and covers the change in interest rate & liquidity and hence in overall financial swing market risk is common. Suppose you have invested in an automobile stock and assume the main forieign market of the company has raised import duty on automobiles which will raise the cost and effect sales of the company and have a negative effect on the stock. The loss which will arise due to this is a part of market risk.
• Interest rate risk - The risk of loss due to change in interest rates is the interest rate risk. Interest rate risk is a part of market risk. This can be related to the current market scenario, as the markets are consistently in downtrend due to the Coronavirus pandemic there is a risk of slowdown in the economy and hence to tackle this the federal reserve have reduced the interest rates to encourage borrowing and keeping the liquidity in the market. However due to this reduce in interest rate the yield on bonds have reduced significantly also bringing the T-bill yield close to zero. Hence interest rate risk will persist in market swings.
• Liquidity Risk - Liquidity risk is the risk of not being able to cash out your returns or companies not being able to meet thier financial commitments. Liquidity risk will persist in a market swing as the liuidity of the company depends on various market factors. Suppose if you have invested in a stock and the stock has suddenly been under financail regulator radar decides on a locking period of 1 year for all investments in the stock. Hence the stock investment is not liquid as you cannot sell them and convert to cash.
• Expropriation risk - In a normal market swing expropriation risk does not exsist, as this risk means the goverment will take over the asset of the company without any compensation to the compnay or its employees or stakeholders. This type of risk usually does not persist in a normal market as the takeover of compnay asset from goverment indicates the very high uncertainity associated with the investment and hence the normal market swing does not have this type of risk. Eg. in a situtation of political turmoil the goverment might decide to take over on the assets of the foreign countries asset. This type of risk is usually present in an unstable country with warlike conditions or civil unrest. Hence expropriation risk is not a part of risks in a normal market scenario.