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Definition of Call risk

Call Risk Image 1

Call risk

The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.



Related Terms:

acid test ratio (also called the quick ratio)

The sum of cash, accounts receivable, and short-term marketable
investments (if any) is divided by
total current liabilities to compute this ratio. Suppose that the short-term
creditors were to pounce on a business and not agree to roll over the
debts owed to them by the business. In this rather extreme scenario, the
acid test ratio reveals whether its cash and near-cash assets are enough
to pay its short-term current liabilities. This ratio is an extreme test that
is not likely to be imposed on a business unless it is in financial straits.
This ratio is quite relevant when a business is in a liquidation situation
or bankruptcy proceedings.


Asset-specific Risk

The amount of total risk that can be eliminated by diversification by
creating a portfolio. Also known as company-specific risk or
unsystematic risk.


Bankruptcy risk

The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk.


Basis risk

The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for
price risk.


Beta risk

risk of a firm measured from the standpoint of an investor who holds a highly diversified portfolio.



Business risk

The risk that the cash flow of an issuer will be impaired because of adverse economic
conditions, making it difficult for the issuer to meet its operating expenses.


Call

An option that gives the right to buy the underlying futures contract.


Call Risk Image 2

Call

a. An option to buy a certain quantity of a stock or commodity for a
specified price within a specified time. See Put.
b. A demand to submit bonds to the issuer for redemption before the maturity date.
c. A demand for payment of a debt.
d. A demand for payment due on stock bought on margin.


Call an option

To exercise a call option.


Call date

A date before maturity, specified at issuance, when the issuer of a bond may retire part of the bond
for a specified call price.


Call money rate

Also called the broker loan rate , the interest rate that banks charge brokers to finance
margin loans to investors. The broker charges the investor the call money rate plus a service charge.


Call option

An option contract that gives its holder the right (but not the obligation) to purchase a specified
number of shares of the underlying stock at the given strike price, on or before the expiration date of the
contract.
call premium
Premium in price above the par value of a bond or share of preferred stock that must be paid to
holders to redeem the bond or share of preferred stock before its scheduled maturity date.


Call Option

A contract that gives the holder the right to buy an asset for a
specified price on or before a given expiration (maturity) date


call option

Right to buy an asset at a specified exercise price on or before the exercise date.


Call price

The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a
specified call date.


Call price

The price for which a bond can be repaid before maturity under a call provision.


Call Risk Image 3

Call protection

A feature of some callable bonds that establishes an initial period when the bonds may not be
called.


Call provision

An embedded option granting a bond issuer the right to buy back all or part of the issue prior
to maturity.



Call swaption

A swaption in which the buyer has the right to enter into a swap as a fixed-rate payer. The
writer therefore becomes the fixed-rate receiver/floating rate payer.


Callable

A financial security such as a bond with a call option attached to it, i.e., the issuer has the right to
call the security.


Callable bond

A bond that allows the issuer to buy back the bond at a
predetermined price at specified future dates. The bond contains an embedded
call option; i.e., the holder has sold a call option to the issuer. See Puttable
bond.


callable bond

Bond that may be repurchased by the issuer before maturity at specified call price.


Commercial risk

The risk that a foreign debtor will be unable to pay its debts because of business events,
such as bankruptcy.


Company-specific risk

Related: Unsystematic risk


Companyspecific Risk

See asset-specific risk


Completion risk

The risk that a project will not be brought into operation successfully.


Counterparty risk

The risk that the other party to an agreement will default. In an options contract, the risk
to the option buyer that the option writer will not buy or sell the underlying as agreed.
Country economic risk Developments in a national economy that can affect the outcome of an international
financial transaction.


Call Risk Image 4

Country financial risk

The ability of the national economy to generate enough foreign exchange to meet
payments of interest and principal on its foreign debt.



Country risk General

Level of political and economic uncertainty in a country affecting the value of loans or
investments in that country.


Covered call

A short call option position in which the writer owns the number of shares of the underlying
stock represented by the option contracts. Covered calls generally limit the risk the writer takes because the
stock does not have to be bought at the market price, if the holder of that option decides to exercise it.


Covered call writing strategy

A strategy that involves writing a call option on securities that the investor
owns in his or her portfolio. See covered or hedge option strategies.


Credit risk

The risk that an issuer of debt securities or a borrower may default on his obligations, or that the
payment may not be made on a negotiable instrument. Related: Default risk


Credit Risk

Financial and moral risk that an obligation will not be paid and a loss will result.


Cross-border risk

Refers to the volatility of returns on international investments caused by events associated
with a particular country as opposed to events associated solely with a particular economic or financial agent.


Currency risk

Related: Exchange rate risk


Currency risk sharing

An agreement by the parties to a transaction to share the currency risk associated with
the transaction. The arrangement involves a customized hedge contract embedded in the underlying
transaction.


Default risk

Also referred to as credit risk (as gauged by commercial rating companies), the risk that an
issuer of a bond may be unable to make timely principal and interest payments.


Deferred call

A provision that prohibits the company from calling the bond before a certain date. During this
period the bond is said to be call protected.


Diversifiable risk

Related: unsystematic risk.


Economic risk

In project financing, the risk that the project's output will not be salable at a price that will
cover the project's operating and maintenance costs and its debt service requirements.


economically reworked

when the incremental revenue from the sale of reworked defective units is greater than
the incremental cost of the rework


Effective call price

The strike price in an optional redemption provision plus the accrued interest to the
redemption date.


Equilibrium market price of risk

The slope of the capital market line (CML). Since the CML represents the
return offered to compensate for a perceived level of risk, each point on the line is a balanced market
condition, or equilibrium. The slope of the line determines the additional return needed to compensate for a
unit change in risk.


Event risk

The risk that the ability of an issuer to make interest and principal payments will change because
of rare, discontinuous, and very large, unanticipated changes in the market environment such as (1) a natural
or industrial accident or some regulatory change or (2) a takeover or corporate restructuring.


Exchange rate risk

Also called currency risk, the risk of an investment's value changing because of currency
exchange rates.


Exchange risk

The variability of a firm's value that results from unexpected exchange rate changes or the
extent to which the present value of a firm is expected to change as a result of a given currency's appreciation
or depreciation.


Fallout risk

A type of mortgage pipeline risk that is generally created when the terms of the loan to be
originated are set at the same time as the sale terms are set. The risk is that either of the two parties, borrower
or investor, fails to close and the loan "falls out" of the pipeline.


Financial risk

The risk that the cash flow of an issuer will not be adequate to meet its financial obligations.
Also referred to as the additional risk that a firm's stockholder bears when the firm utilizes debt and equity.


financial risk

risk to shareholders resulting from the use of debt.


Firm-specific risk

See:diversifiable risk or unsystematic risk.


First-call

With CMOs, the start of the cash flow cycle for the cash flow window.


Flat price risk

Taking a position either long or short that does not involve spreading.


Force majeure risk

The risk that there will be an interruption of operations for a prolonged period after a
project finance project has been completed due to fire, flood, storm, or some other factor beyond the control
of the project's sponsors.


Foreign exchange risk

The risk that a long or short position in a foreign currency might have to be closed out
at a loss due to an adverse movement in the currency rates.


Funding risk

Related: interest rate risk


Geographic risk

risk that arises when an issuer has policies concentrated within certain geographic areas,
such as the risk of damage from a hurricane or an earthquake.


Herstatt risk

The risk of loss in foreign exchange trading that one party will deliver foreign exchange but the counterparty financial institution will fail to deliver its end of the contract. It is also referred to as settlement risk.


High-Risk Small Business

Firm viewed as being particularly subject to risk from an investors perspective.


Idiosyncratic Risk

Unsystematic risk or risk that is uncorrelated to the overall market risk. In other words,
the risk that is firm specific and can be diversified through holding a portfolio of stocks.


Implied call

The right of the homeowner to prepay, or call, the mortgage at any time.


Inflation risk

Also called purchasing-power risk, the risk that changes in the real return the investor will
realize after adjusting for inflation will be negative.


Insolvency risk

The risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk.


Interest rate risk

The risk that a security's value changes due to a change in interest rates. For example, a
bond's price drops as interest rates rise. For a depository institution, also called funding risk, the risk that
spread income will suffer because of a change in interest rates.


Interest Rate Risk

Possibility that interest rates will rise during the term of a loan thereby increasing the annual cost of borrowing.


Irrational call option

The implied call imbedded in the MBS. Identified as irrational because the call is
sometimes not exercised when it is in the money (interest rates are below the threshold to refinance).
Sometimes exercised when not in the money (home sold without regard to the relative level of interest rates).


judgmental method (of risk adjustment)

an informal method of adjusting for risk that allows the decision maker
to use logic and reason to decide whether a project provides
an acceptable rate of return


Liquidity risk

The risk that arises from the difficulty of selling an asset. It can be thought of as the difference
between the "true value" of the asset and the likely price, less commissions.


Margin call

A demand for additional funds because of adverse price movement. Maintenance margin
requirement, security deposit maintenance
Margin of safety With respect to working capital management, the difference between 1) the amount of longterm
financing, and 2) the sum of fixed assets and the permanent component of current assets.


Market price of risk

A measure of the extra return, or risk premium, that investors demand to bear risk. The
reward-to-risk ratio of the market portfolio.


Market risk

risk that cannot be diversified away. Related: systematic risk


Market Risk

The amount of total risk that cannot be eliminated by portfolio
diversification. The risk inherent in the general economy as a
whole. Also known as systemic risk.


market risk

Economywide (macroeconomic) sources of risk that affect the overall stock market. Also called systematic risk.


Market Risk

The part of security's risk that cannot be eliminated by diversification. It is measured by the beta coefficient.


market risk premium

risk premium of market portfolio. Difference between market return and return on risk-free Treasury bills.


Mortgage-pipeline risk

The risk associated with taking applications from prospective mortgage borrowers
who may opt to decline to accept a quoted mortgage rate within a certain grace period.


net income (also called the bottom line, earnings, net earnings, and net

operating earnings)
This key figure equals sales revenue for a period
less all expenses for the period; also, any extraordinary gains and losses
for the period are included in this final profit figure. Everything is taken
into account to arrive at net income, which is popularly called the bottom
line. Net income is clearly the single most important number in business
financial reports.


Nondiversifiable risk

risk that cannot be eliminated by diversification.


Nonsystematic risk

Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also
called unique risk or diversifiable risk. Systematic risk refers to risk factors common to the entire economy.


Operating risk

The inherent or fundamental risk of a firm, without regard to financial risk. The risk that is
created by operating leverage. Also called business risk.


operating risk (business risk)

risk in firm’s operating income.


Overnight delivery risk

A risk brought about because differences in time zones between settlement centers
require that payment or delivery on one side of a transaction be made without knowing until the next day
whether the funds have been received in an account on the other side. Particularly apparent where delivery
takes place in Europe for payment in dollars in New York.


Political risk

Possibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of
foreign currency, or other changes in the business climate of a country.


Price risk

The risk that the value of a security (or a portfolio) will decline in the future. Or, a type of
mortgage-pipeline risk created in the production segment when loan terms are set for the borrower in advance
of terms being set for secondary market sale. If the general level of rates rises during the production cycle, the
lender may have to sell his originated loans at a discount.


Product risk

A type of mortgage-pipeline risk that occurs when a lender has an unusual loan in production or
inventory but does not have a sale commitment at a prearranged price.


Provisional call feature

A feature in a convertible issue that allows the issuer to call the issue during the noncall
period if the price of the stock reaches a certain level.


Purchasing-power risk

Related: inflation risk


Put-call parity relationship

The relationship between the price of a put and the price of a call on the same
underlying security with the same expiration date, which prevents arbitrage opportunities. Holding the stock
and buying a put will deliver the exact payoff as buying one call and investing the present value (PV) of the
exercise price. The call value equals C=S+P-PV(k).


Rate risk

In banking, the risk that profits may decline or losses occur because a rise in interest rates forces up
the cost of funding fixed-rate loans or other fixed-rate assets.


Regulatory pricing risk

risk that arises when regulators restrict the premium rates that insurance companies
can charge.


Reinvestment risk

The risk that proceeds received in the future will have to be reinvested at a lower potential
interest rate.


Residual risk

Related: unsystematic risk


Reverse price risk

A type of mortgage-pipeline risk that occurs when a lender commits to sell loans to an
investor at rates prevailing at application but sets the note rates when the borrowers close. The lender is thus
exposed to the risk of falling rates.


Risk

Typically defined as the standard deviation of the return on total investment. Degree of uncertainty of
return on an asset.


risk

uncertainty; it reflects the possibility of differences between
the expected and actual future returns from an investment


Risk

The degree of uncertainty associated with the return on an asset.


Risk

A state in which the number of possible future events exceeds the number of events that will actually occur, and some measure of probability can be attached to them.


risk

risk measures the possibility that your investment may lose or gain value as compared to the expected rate of return. risk is different from uncertainty, which is not measurable.


Risk

Calculated chance of loss.


Risk-adjusted

return Return earned on an asset normalized for the amount of risk associated with that asset.



 

 

 

 

 

 

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