Define value at a risk and explain the uses and limitations of VaRValue at a rik is a statistical method used in measuring and avluing the extent of risk a fiancial institutioj is exposed to over a spefic period of time. Value at a risk is used by risk managers in meauirng and controlling the risl level of a given ornaization. The risk manager’s job is to ensure that risks are not taken beyond the level at which the firm can absorb the losses of a probable worst outcome. One disadvatge of VaR is that it uses volatility. The main problem with volatility, however, is that it does not care about the direction of an investment’s movement: a stock can be volatile because it suddenly jumps higher.
Describe the various types of risk in a bank an and explian the strategies to for risk management in a bank
Liquidity risk is the risk of negative effects on the financial result and capital of the bank caused by the bank’s inability to meet all its due obligations.
Credit risk is the risk of negative effects on the financial result and capital of the bank caused by borrower’s default on its obligations to the bank.
Market risk includes interest rate and foreign exchange risk.
Interest rate risk is the risk of negative effects on the financial result and capital of the bank caused by changes in interest rates.
Foreign exchange risk is the risk of negative effects on the financial result and capital of the bank caused by changes in exchange rates.
Exposure risks include risks of bank’s exposure to a single entity or a group of related entities, and risks of banks’ exposure to a single entity related with the bank.
Investment risks include risks of bank’s investments in entities that are not entities in the financial sector and in fixed assets.
