answer the question
Q1:
20 years: In the late 1990s the gold price reached its lowest level in real terms for two decades. The reasons why it was so weak during the so-called “Clinton boom” from 1995 to 2001 come surprisingly from MMT (modern monetary theory), a theory that in many points opposes gold, in particularly because its proponents are in love with fiat, “the lawful act to declare paper as money”. However, they do not like excessive private debt, which is an idea common to Austrian economists.
But much of the stage was set in 2008 for gold’s rise in 2009 – and for the next few years – when the global financial crisis was entering its darkest days. To recap what happened in the last quarter of 2008, the U.S. Treasury seized control of mortgage lenders Fannie Mae and Freddie Mac in September 2008 and said it offered a $200 billion cash injection for firms dealing with mortgage default losses. The most immediate reason for gold’s woes is the strong dollar. Gold is priced in dollars, so if the American currency goes up, investors mark down the yellow metal accordingly. An added factor is that the dollar is rising because of the revival of the American economy, which is bringing the prospect of higher interest rates.
6 menthes: In December, the price of gold was at the top level and that due to at the end of December the price of gold was decreased suddenly. The big news of course is that the Fed hiked rates another 25 basis points. So far, stock market speculators don’t seem to care. They should. The present value of all future earnings depends on the interest rate, and every upwards tick is a substantial downward revision of earnings in out years. However, the bull is so strongly entrenched that it may take a while for this to sink in. We also think of the companies who were borrowing to buy their own shares, and for that matter borrowing to pay dividends.
Q2:
a. Credit risk: is the type of risk of evasion on a debt that may emerge from a borrower failing to do needed payments. Firstly, the risk is that of the lender which includes lost principal and interest, interruption to cash flows, together with improved collection costs. This loss may be complete or partial. In an efficient market, higher points of credit risk will always be related with huge borrowing costs in an efficient market type. Following this measures of borrowing costs which includes yield spreads can be used to surmise credit risk levels grounded on assessments by current market participants. A good existing example is what happens in local retail shop where buyer in this case will lend money or take goods on credit suggesting to pay later but unfortunately fail to respect that deal.
There actually two kinds of risks associated with bonds that is interest risk and credit risk. They can have very dissimilar impacts on various assets within the bond market. As earlier learnt that interest is the vulnerability of a bond or fixed income asset class to movements in the prevailing rates
b. Interest rate risk: is the kind of risk that arises for bond proprietors from changing interest rates. The amount of interest rate risk a bond has is determined by how complex its price is to interest rate variations in the wide market. The sensitivity is influenced by two things, the bond's period to development, and the coupon rate of the bond. For example when an investor buys securities that offer a fixed rate of return, they will be exposing themselves to rate risk. This can happen in bonds and also for preferred stocks. There actually two kinds of risks associated with bonds that is interest risk and credit risk. They can have very dissimilar impacts on various assets within the bond market. As credit risk is to mean bond sensitivity to default, or the chance that a portion of the principal and interest will not be paid to investors. Bonds are actually elevated interest risks tend to perform well when rates are falling but they will underperform when interest rates are rising.
c. Off-balance-sheet risk: also known as incognito leverage, which basically means that an asset or debt activity that is not on the company's balance sheet. A good example of an off-balance sheet item is total return swaps. Other companies can have important quantities of off-balance sheet assets and liabilities. For instance financial institutions habitually compromise asset management services to some of their clients. The assets are managed as part of offered services which include securities that usually belong to the individual clients or in trust, even though the company offers management, depository or other necessary services to the new clients. The company actually has no direct link to the assets, making no record on its balance sheet therefore being off-balance sheet assets, while usually having some elementary fiduciary obligations with deference to the client.
d. Foreign exchange risk: is a financial risk that emerges when a certain financial transaction is denominated in a currency other than that of the base currency of the company. This risk also exists when the foreign supplementary of a firm preserves financial statements in any other currency compared to the reporting currency of the consolidated unit. The existing risk is that for instance an adverse effort in the exchange rate of the value currency in relation to the base currency beforehand when the transaction is accomplished. Major investors and businesses both exporting and importing goods and services or rather establishing foreign savings have a certain exchange rate risk which can have severe financial magnitudes probably negative but several steps may be engaged to manage a reduction this kind of risk. The major relations of this type of risk with others is the sovereignty type of risk which go hand with foreign exchange risk. The best existing example in this case is for investors who import and export goods and services in and out of the country in so doing they are making foreign exchange rates to have risks.
In the following situation when foreign exchange rate risk and country risks merge when anyone who faces sovereign risk is exposed to foreign country in one way or another. Foreign exchange traders and also investors face the risk that a foreign central bank will change its monetary policy so that it affects currency trades at large.
e. Country or sovereign risk: Sovereign or country credit risk is the type of risk of a certain government or state being disinclined or unable to deal with its loan compulsions. Several countries really dealt with this sovereign risk during the global recession period. This type of risk being in existence translate that creditors should do a two-stage pronouncement process when determining who to lend to a firm based in a foreign country. If this is done one may have to consider the sovereign risk worth of the country then deliberate on the firm's credit quality. Sovereignty risk may result from credit risk this is because almost both of this risks are the same it is just that sovereignty risk is established across nations or countries. In the following situation when foreign exchange rate risk and country risks merge when anyone who faces sovereign risk is exposed to foreign country in one way or another. Foreign exchange traders and also investors face the risk that a foreign central bank will change its monetary policy so that it affects currency trades at large. In a some certain circumstances if rarely does sovereignty risk relates to technological risks that is when the prices and variations in the country or sovereign matters are influenced by technological difference or improvement therein.
f. Technology risk: Technology risks intimidates assets and practices significant to a business that may hinder compliance with rules and regulations, impact profitability, furthermore damage the company’s reputation in the wide market. This can risk result from human error, malicious intentions and also compliance guidelines. This type of risk occurs for example when there is a potential for technology disappointments that interrupts your business on things like information, security and service outages. In a some certain circumstances if rarely does technological risk relates to country risks that is when the prices and variations in the country or sovereign matters are influenced by technological difference or improvement therein.
g. Market risk: is basically caused due to movements in market prices. Type of risk that is possible for an investor to be involved in huge losses due to factors that normally impact on the general performance of the financial market in which he or she is involved. This risk cannot be eradicated through broadening. For examples of market risk include political turmoil, recession changes in interest rates, natural disasters like floods and finally terrorist attacks. When in a certain situation market liquidity happens where an asset cannot be sold due to the lack of liquidity in the market that is essentially a subset of market risk. This can always be accounted for through widening offer spread and making explicit liquidity reserves.
h. Liquidity risk: is the risk that a certain company may be incompetent to meet short term monetary demands. The above normally occurs due to the inability to convert a hard asset to cash without a loss of capital and income in the process of conversion. A basic example where liquidity risk normally emerge when a business or individual with instant cash necessities, holds a valuable asset that may not sell at market value because of lack of buyers, or having an incompetent market where it is hard to bring buyers and sellers together in the market. For example is selling real estate. In some cases may be difficult to sell a property at a given moment should be needed unlike securities or blue chip stock. The relation between market risk and liquidity risk is as follows. When in a certain situation market liquidity happens where an asset cannot be sold due to the lack of liquidity in the market that is essentially a subset of market risk. This can always be accounted for through widening offer spread and making explicit liquidity reserves.