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Financial Terms | |
Economic risk |
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Definition of Economic riskEconomic riskIn project financing, the risk that the project's output will not be salable at a price that will
Related Terms:American Depositary Receipts (ADRs)Certificates issued by a U.S. depositary bank, representing foreign Counterparty riskThe risk that the other party to an agreement will default. In an options contract, the risk Asset-specific RiskThe amount of total risk that can be eliminated by diversification by Bankruptcy riskThe risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk. Basis riskThe uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for Beta riskrisk of a firm measured from the standpoint of an investor who holds a highly diversified portfolio. Business riskThe risk that the cash flow of an issuer will be impaired because of adverse economic ![]() Call riskThe combination of cash flow uncertainty and reinvestment risk introduced by a call provision. Classical MacroeconomicsThe school of macroeconomic thought prior to the rise of Keynesianism. Commercial riskThe risk that a foreign debtor will be unable to pay its debts because of business events, Company-specific riskRelated: Unsystematic risk Companyspecific RiskSee asset-specific risk Completion riskThe risk that a project will not be brought into operation successfully. Country financial riskThe ability of the national economy to generate enough foreign exchange to meet Country risk GeneralLevel of political and economic uncertainty in a country affecting the value of loans or Credit riskThe risk that an issuer of debt securities or a borrower may default on his obligations, or that the ![]() Credit RiskFinancial and moral risk that an obligation will not be paid and a loss will result. Cross-border riskRefers to the volatility of returns on international investments caused by events associated Currency riskRelated: Exchange rate risk Currency risk sharingAn agreement by the parties to a transaction to share the currency risk associated with Default riskAlso referred to as credit risk (as gauged by commercial rating companies), the risk that an Diversifiable riskRelated: unsystematic risk. Economic assumptionseconomic environment in which the firm expects to reside over the life of the economic components modelAbrams’ model for calculating DLOM based on the interaction of discounts from four economic components. Economic defeasanceSee: in-substance defeasance. Economic dependenceExists when the costs and/or revenues of one project depend on those of another. Economic earningsThe real flow of cash that a firm could pay out forever in the absence of any change in Economic exposureThe extent to which the value of the firm will change because of an exchange rate change. Economic incomeCash flow plus change in present value. economic integrationthe creation of multi-country markets Economic lifeThe period over which a company expects to be able to use an asset. economic order quantityOrder size that minimizes total inventory costs. Economic order quantity (EOQ)The order quantity that minimizes total inventory costs. economic order quantity (EOQ)an estimate of the number economic production run (EPR)an estimate of the number Economic rentsProfits in excess of the competitive level. Economic surplusFor any entity, the difference between the market value of all its assets and the market Economic unionAn agreement between two or more countries that allows the free movement of capital, Economic Value Added (EVA)Operating profit, adjusted to remove distortions caused by certain accounting rules, less a charge economic value added (EVA)a measure of the extent to which income exceeds the dollar cost of capital; calculated economic value added (EVA)Term used by the consulting firm Stern Stewart for profit remaining after deduction of the cost economically reworkedwhen the incremental revenue from the sale of reworked defective units is greater than EconomicsThe study of the allocation and distribution of scare resources among competing wants. Equilibrium market price of riskThe slope of the capital market line (CML). Since the CML represents the Event riskThe risk that the ability of an issuer to make interest and principal payments will change because Exchange rate riskAlso called currency risk, the risk of an investment's value changing because of currency Exchange riskThe variability of a firm's value that results from unexpected exchange rate changes or the Fallout riskA type of mortgage pipeline risk that is generally created when the terms of the loan to be Financial riskThe risk that the cash flow of an issuer will not be adequate to meet its financial obligations. financial riskrisk to shareholders resulting from the use of debt. Firm-specific riskSee:diversifiable risk or unsystematic risk. Flat price riskTaking a position either long or short that does not involve spreading. Force majeure riskThe risk that there will be an interruption of operations for a prolonged period after a Foreign exchange riskThe risk that a long or short position in a foreign currency might have to be closed out Funding riskRelated: interest rate risk Geographic riskrisk that arises when an issuer has policies concentrated within certain geographic areas, Herstatt riskThe 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 BusinessFirm viewed as being particularly subject to risk from an investors perspective. Idiosyncratic RiskUnsystematic risk or risk that is uncorrelated to the overall market risk. In other words, Inflation riskAlso called purchasing-power risk, the risk that changes in the real return the investor will Insolvency riskThe risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk. Interest rate riskThe risk that a security's value changes due to a change in interest rates. For example, a Interest Rate RiskPossibility that interest rates will rise during the term of a loan thereby increasing the annual cost of borrowing. judgmental method (of risk adjustment)an informal method of adjusting for risk that allows the decision maker Leading economic indicatorseconomic series that tend to rise or fall in advance of the rest of the economy. Liquidity riskThe risk that arises from the difficulty of selling an asset. It can be thought of as the difference MacroeconomicsThe study of the determination of economic aggregates such as total output and the price level. Market price of riskA measure of the extra return, or risk premium, that investors demand to bear risk. The Market riskrisk that cannot be diversified away. Related: systematic risk Market RiskThe amount of total risk that cannot be eliminated by portfolio market riskEconomywide (macroeconomic) sources of risk that affect the overall stock market. Also called systematic risk. Market RiskThe part of security's risk that cannot be eliminated by diversification. It is measured by the beta coefficient. market risk premiumrisk premium of market portfolio. Difference between market return and return on risk-free Treasury bills. MicroeconomicsThe study of firm and individual decisions insofar as they affect the allocation and distribution of goods and services. Mortgage-pipeline riskThe risk associated with taking applications from prospective mortgage borrowers Nondiversifiable riskrisk that cannot be eliminated by diversification. Nonsystematic riskNonmarket or firm-specific risk factors that can be eliminated by diversification. Also Operating riskThe inherent or fundamental risk of a firm, without regard to financial risk. The risk that is operating risk (business risk)risk in firm’s operating income. Overnight delivery riskA risk brought about because differences in time zones between settlement centers Political riskPossibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of Price riskThe risk that the value of a security (or a portfolio) will decline in the future. Or, a type of Product riskA type of mortgage-pipeline risk that occurs when a lender has an unusual loan in production or Purchasing-power riskRelated: inflation risk Rate riskIn banking, the risk that profits may decline or losses occur because a rise in interest rates forces up Regulatory pricing riskrisk that arises when regulators restrict the premium rates that insurance companies Reinvestment riskThe risk that proceeds received in the future will have to be reinvested at a lower potential Residual riskRelated: unsystematic risk Reverse price riskA type of mortgage-pipeline risk that occurs when a lender commits to sell loans to an RiskTypically defined as the standard deviation of the return on total investment. Degree of uncertainty of riskuncertainty; it reflects the possibility of differences between RiskThe degree of uncertainty associated with the return on an asset. RiskA 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. riskrisk 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. RiskCalculated chance of loss. Risk-adjustedreturn Return earned on an asset normalized for the amount of risk associated with that asset. risk-adjusted discount rate methoda formal method of adjusting for risk in which the decision maker increases the rate used for discounting the future cash flows to compensate for increased risk Risk-adjusted profitabilityA probability used to determine a "sure" expected value (sometimes called a Risk arbitrageSpeculation on perceived mispriced securities, usually in connection with merger and Related to : financial, finance, business, accounting, payroll, inventory, investment, money, inventory control, stock trading, financial advisor, tax advisor, credit. |