2. The following quotation is from Donald Rumsfeld, secretary of defense under P
ID: 2808400 • Letter: 2
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2. The following quotation is from Donald Rumsfeld, secretary of defense under Presi- dent George W. Bush from 2001 to 2006: Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns-the ones we don't know we don't know Discuss this quotation in the context of risk and uncertainty.Explanation / Answer
2. The quotation aptly explains the possibility of encountering with risks and uncertainties as they are bound to exist. Risk is the loss that is likely to occur due to unfavourable conditions. Uncertainty is being unsure about possible results. Uncertainty can be accounted as one of the possible reasons for risk. Risk can never be eliminated it can only be minimized through conscious efforts. The known knowns are things we know that could happen ie., probably a demand fall . Due to entry of a strong competitor the demand of the products is likely to fall. Knowing this risk of demand fall, the company could make sincere efforts to revamp it's existing product, give more thrust on advertising and marketing so that the entry of competitor does not affects it's operations. In short the known knowns can be mitigated.
The known unknowns are the uncertainties, rather, contingencies . Take for example a government policy that could affect the business. The implementation of such a policy would require the business to alter it's policy but remember only when such policy comes into practice. Thus the known unknowns can also be mitigated if there is scope for making alterations in the existing policy framework of the company.
The most difficult and hard to predict are the unknown unknowns. Such risks which occur in the due course of business can totally put the operations in stand still if not properly handled.most of the risks are of this nature and it requires well established plans and courses g actions so that they do not hamper the operations.
10. Securitization is the process of converting illiquid assets to marketable securities. In securitization, debts/loans which do not fetch cash flow are accumulated and converted to securities and then sold to investors in capital market.
Asset securitization helps in transferring the credit risk , interest rate risk, liquidity risk of the issuer to investors in capital market.
11. Structured finance as the name suggests are structured financial products offered to te borrowers to meet their complex and sophisticated needs. Borrowers sometimes will not be sufficient with vanilla loans and advances but would require complex instruments with are risky , these are called structured financial products.These are extended only to large borrowers needing huge sum of capital.
Syndicated loan and collateralised bond obligations are examples of structured financial products.
16. Even though it is said that government securities are interest free, it only means they are free of default risk. The interest rate risk however persists. 20 years being a very long period of investment, if at all the rate of interest change in an adverse way, the 3% returns is ny guaranteed.
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