FRM Financial Risk Manager Practice Test

Inflation risk is the possibility that the value of assets or income will decrease as inflation reduces the purchasing power of the currency. Inflation happens when the overall general price of goods and services in an economy moves upward. It is usually measured by the Consumer Price Index and the Producer Price Index in the US. Severe inflation causes loss of confidence, less investment, and economic instability because the purchasing power of the currency erodes as prices increase. Therefore, inflation involves the risk that the value of assets or incomes will decrease. The higher the inflation rate, the more risk it involves.

Key Takeaway: Zimbabwe's rate of inflation surged to 3,732% in 2008. Hope you weren’t holding Zimbabwe dollars.