Risk management Essay Example | Topics and Well Written Essays - 2000 words

Risk management - Essay ExampleThis address will focus on the different types of yield issues and how changes in the slope of yield twist around impacts the future tense prospects of the economy. Further, it will excessively take into consideration the effectiveness of monetary policy responses in the time of fiscal crisis and how those responses have affected the shape of the yield curve. turn off of Contents Executive Summary 2 Table of Contents 3 Introduction 4 Task 1 To Examine the Types of Yield Curve 4 Task 2 Impact of Yield Curve on Future Economic Prospect 6 Task 3 Effectiveness of Monetary indemnity 9 Task 4 Implication for Investor and Policy makers 10 Conclusion 10 Appendices 11 Reference 13 Introduction A yield curve is referred to the graphical representation of the relationship among the yield on a group of securities for different maturities. It explains how raise rate differ with the precondition to maturity (Burton, Burton and Nesiba, 2010, p.115). The yield curve has too much information about the economic conditions and the future interest judge. In U.S. the benchmark interest rate last recorded was at 0.25%. national Reserve reports the interest rates in U.S. Historically, from 1971 to 2013, the interest rate of U.S. averaged 6.17 % and recorded a high of 20% in March 1980 and a low of 0.25% in December 2008. Interest rate changes depend non only on what Federal Reserve does today or next year but also on perception of the people about the goals and reliability of the monetary authority. In U.S. the monetary policy is set(p) by the Federal Reserve. The goals and the associated expectations depends on the arrangement of the monetary policy (Haubrich, 2004, p.1). The yield curve is used by the investors to understand the future prospects of economic activities. Task 1 To Examine the Types of Yield Curve The structure of interest rates can be characterized by a graph which shows the relationship between the yields to maturity as a function of term to maturity. Such a graph is termed as yield curve. There be four different types of yield curve for U.S. Treasury securities such as normal yield curve or upward tilt yield curve, inverted yield curve or downward sloping yield curve, flat yield curve and humped yield curve. There atomic number 18 two theories which are used to explain the shapes of yield curves. The pure expectation theory reflects the current expectation of the future rates of the market and the market segmentation theory signifies that the shape of yield curve is established by remove for and supply of securities within each maturity sector. In normal yield curve long term rates are high in position than short term rates. The securities with longest maturity allow the highest returns and the shortest maturity securities provide lowest returns. Generally it is upward sloping. The normal yield curve signifies the normal conditions of the nifty markets. It presents the borrowers with the risk -return trade-off (Droms and Wright, 2010, pp.144-145). It entails that the investors of the U.S. expect growth in the economy in the future and for this growth to lead to high interest rates and high inflation. They dont purchase longer term securities without receiving a higher interest r