Investments & Returns - Essay Example

Systematic risk, in finance, also known as non-controllable or non-diversifiable risk is the uncertainty in financial returns caused by factors that are beyond the control of an entity. These factors are macro-economic in nature. This type of risk cannot be managed by the organizations. They are the interest rate risk, the inflationary risk, the exchange risk and the market risk. The interest rate risk is caused by the movements in the cost of debt, thereby causing a decline or an increase in the interest payment on debt finance.

An increase in the interest rate is unfavourable to the borrowers who will dig deeper into their pockets in order to meet the cost of debt. On the other hand, an increase in the interest rate is favourable to the lender due to an increase in the return. The opposite of the statement is true (Akrani, 2012). The inflationary risk is caused by a future increase or decrease in the commodity prices due to a deficit or a surplus in the supply level. An increase in the inflation reduces the real value of the local currency while a decrease in the inflation increases the real value of the local currency.

A decline in the value of the local currency reduces the value of organizations, whereas, an increase in the value of the local currency increases the value of organizations. The exchange rate risk is caused by the volatility of the exchange rate. The exchange rate is the price of a local currency against that of the foreign currency. Companies that have subsidiaries in the internal market lose/gain when converting foreign currency to local currency when the exchange rate decreases/increases (Akrani, 2012).

A decrease in the exchange rate means that less local currency is given up for the foreign the foreign currency. On the other hand, an increase in the exchange rate means that more local currency is given up for the foreign currency. The market risk is caused by the rise and fall in the prices of shares and other securities in the