COMSATS UNIVERSITY ISLAMABAD

MANAGEMENT SCIENCES DEPARTMENT

CREDIT MANAGEMENT
(MGT534)
Assignment 05

Submitted By:
Mohammed Mustansir
(FA19-BAF-070)
Submitted To:
Dr Wajid Shakeel Ahmed
Q1. How many type of risks are there in context of financial transactions? From the perspective of a
CRO, how to do define credit risk when it comes in the shape of settlement risk?

Ans: Credit risk is the probability that a borrower will not pay back a loan in accordance with the terms
of the agreement. It is the risk of loss caused by consumer default on credit products, including
amortized loans, credit cards, revolving credits, and residential mortgages. Credit risk can arise in
different ways.

Following are the types of risk associated with financial transactions:

 Default Risk: When borrowers are unable to make contractual payments, default risk can occur.
 Credit Spread Risk: Credit spread risk is typically caused by the changeability between interest rates
and the risk-free return rate
 Operational risks arising from day-to-day operations. Whilst a credit of a cheque to the wrong
account poses an operational risk at a bank, the pilferage of stock is an operating risk for a retailer.
 Legal Risk: This type of financial risk arises out of legal constraints such as lawsuits. Whenever a
company needs to face financial losses out of legal proceedings, it is a legal risk.
 Liquidity Risk: This type of risk arises out of an inability to execute transactions.
 Market Risk: This type of risk arises due to the movement in prices of financial instrument. Market
risks crop up from the business environment in which the firm operates. The new product launched
by a competitor, or the emergence of a new competitor are some of the common instances of
market risks

Settlement risk

Settlement risk arises when the conduit through which the payment is channeled fails to pay. For
instance, sometimes the moneys sent from the Middle East to the US have been confiscated due to
suspicion related to terrorism links; (ii) or sometimes, UN sanctions prevent dealing with certain
countries and this may also result in failure of payments, even if the counterparty is creditworthy; (iii)
or, the collapse of banks. Usually, settlement risk is non-existent in domestic transactions because of the
centralized clearance controlled by the Central Bank, although isolated settlement risks leading to credit
loss cannot be fully ruled out.