Question

Using a relevant example, detail your understanding of the relationship between risk and
the various trade finance instruments.

Answer 1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

Risk- Reward Relationship:

There is a direct relationship between the risk associated and the return gained.

As per Risk-Reward Relationship: The higher the risk associated in the project, the higher the chances of gains (or losses) or vice-versa.

The same applies to financial instruments.

From the Investor's perspective the risk:

Highest: Equity

Medium: preference

Lowest: bonds.

From the investors perspective of Return.

Highest: Equity

Medium: preference

Lowest: bonds.

Explanation:

When a firm faces bankruptcy, it means that its liabilities are more than its assets.

1st Payment goes to bonds.

Equity shareholders sometimes called as residual shareholders are last in line to get any Payment.

It is most likely that they won't get paid.