Question

In: Finance

Should financial institution’s try to avoid all sources of financial risk? Why or why not?

Should financial institution’s try to avoid all sources of financial risk? Why or why not?

Solutions

Expert Solution

I think, Financial institutions cannot avoid all sources of financial risk, they can avoid to certain extent because they have to operate in this world and do their business, if they avoid all sources, how can they be in the market? They will be out of the market so they have to deal with the financial risk.

Types of financial risk:

  1. Credit risk
  2. Market risk
  3. Default risk
  4. Operational risk
  5. Liquidity risk

These risks can be reduced by the following means:

  1. Taking proper collateral on loan so that if customer is not repaying loan, his property can be sold to recover the loan.
  2. By diversifying the business portfolio in different units and areas so that risk can be diversified.
  3. By taking limited loan, loan increases the liquidity and credit risk for financial institutions.
  4. By tightening the credit policy, provide less credit to customers and if so, charge higher interest over it.
  5. By reducing Non performing assets (NPAs).
  6. Financial institutions can take help from financial derivatives in which, with the help of hedging techniques, they can reduce risk.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Are there particular sources to avoid when looking for credible sources?
Are there particular sources to avoid when looking for credible sources?
What should the RBNZ do to avoid any risk of increasing inflation? Should the OCR be...
What should the RBNZ do to avoid any risk of increasing inflation? Should the OCR be decreased by more or less than the change implied with moderate monetary transmission
6-16: Should all organizations try and analyze big data? Why or why not? What people, organization,...
6-16: Should all organizations try and analyze big data? Why or why not? What people, organization, and technology issues should be addressed before a company decides to work with big data?
All else equal, which of the following activities should increase the financial risk of a firm?...
All else equal, which of the following activities should increase the financial risk of a firm? Decrease common stock dividends Issue new bonds Issue new common stock Repurchase (pay off) outstanding debt An increase in the fixed operating costs
Why, as an investor, should you try to hold a diversified portfolio?
Why, as an investor, should you try to hold a diversified portfolio?
All of the following are reasons why a risk exposure should be monitored more frequently EXCEPT...
All of the following are reasons why a risk exposure should be monitored more frequently EXCEPT the risk exposure materiality is rated as high. the underlying asset's volatility increases. management's risk tolerance increases. the risk exposure has increased likelihood of losses. An organization's cost of risk from losses is the break-even point between the costs of insurance and the costs of uninsured losses for an organization. the cost of all insurance and related administrative costs. the total of all costs...
Why should a woman avoid long lasting anesthesia during delivery of a baby?
Why should a woman avoid long lasting anesthesia during delivery of a baby?
Explain why the reward-to-risk ratio must be equal for all securities if the financial markets are...
Explain why the reward-to-risk ratio must be equal for all securities if the financial markets are efficient.
Why is charcoal sometimes used in recrystallizations? How does it function? Why should you avoid using...
Why is charcoal sometimes used in recrystallizations? How does it function? Why should you avoid using large amounts? "Activated carbon" is used in air and water purifiers. How does it work?
Why financial institutions are managing risk ?
Why financial institutions are managing risk ?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT