Question

What sources of risk does a firm face, and which of those sources are reflected on the firm’s income statement?

Please don't hand write.

Thank you.

Answer 1

A firm faces various risks such as credit risk, foreign exchange risk, interest rate risk, market risk, industry risk and political risk, tax risk and many others. Some of these risks have been described briefly below:

Sl. No.	Type of risk	What it means?
1.	Credit risk	Risk that the counterparty will default in making the scheduled and timely payment. Lenders are subjected to credit risk that borrowers may not make the scheduled payments
2.	Foreign exchange risk	Risk that investment return is unfavourably impacted due to changes in foreign exchange risks
3.	Interest rate risk	Risk that investment value and / or return is impacted by the interest rate movements
4.	Market risk	Risk that investment value or return declines due to market risk factors such as share prices, commodity prices, inflation, interest rate etc
5.	Industry risk	All the risks prevalent in the industry put together. Example: high level of fragmentation is an industry risk in airlines industry. High fixed costs in refinery business is an industry risk
6.	Political risk	Risks originating from the political / government decisions in a country

Sources of risk that are reflected in the income statement include

• business risk,
• exchange rate risk,
• purchasing power risk,
• financial risk,
• interest rate risk,
• tax risk.