Question

What calculations are need to produce a figure for any of the following types of risk?:

- Credit risk

- Foreign exchange risk

- Liquidity Risk

I have key financial data, balance sheet and profit and loss figures for UK banking industry, just not sure how to apply it. Any help would be appreciated, thank you.

Answer 1

ANS: Credit risk is a loss of Principal Amount due to the borrower's Failure of repaying of loan.

Credit Risk is directly proportional to the Overall Re-paying capacity of the buyer to repay the loan

Calutations

1. Calculate the FICO score - It helps to determine the Credit worthiness of consumer by analysing the Reapayment History
2. Demand CIBIL from bank in any loan is availed by him during previous year
3. Calculate Debt to Income ratio : ratio below 35% is considered as Acceptable risk

Foreign Exchange risk is risk caused due to Foreign exchange rate fluctuations. As per Accounting Standard - 11 " THE EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES" the loss & gain shall be recognised depending upon the difference between Buying & Selling rates, which must be recognised as Income or Expense

Liquidity risk Helps the investors to sell the assets or convert to cash. Liquidity risk is the difference between Bid & Ask Spread (Bid rate - Ask Rate )* number of shares.

Note: All above Risk are discussed, you can apply above information to calculate those risks depending upon the data available in your Financial Statements.