What are the risks associated with fundinggap risk?

What will be an ideal response?

Funding gap risk is the dollar amount by which the funding gap will increase due to adversechanges in the factors that impact the assets and liabilities. These risks factors or types are displayed below:

Type of Risk Asset Risk Liability Risk
interest-rate risk × ×
inflation risk × ×
longevity risk × ×
credit risk × ×
liquidity risk × ×
currency risk × ×
call/prepayment risk × ×

The volatility of the funding gap depends on the volatility of the above risk factors. The concern with the volatilityof the funding gap is that regulatory funding requirements may require additionalcontributions by the DB pension plan sponsor. More details are given below.

Interest-rate riskis the risk that the DB pension plan's value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship.

Inflation risk is the risk that the actual rate of inflation experiencedover the DB pension plan's period will be greater than that assumed in projecting liabilities.

Longevity risk for a DB pension plan is the risk that actual life expectancy of plan membersbeyond their retirement date will exceed the life expectancy assumed in projecting theliabilities.

Credit riskrefers to the loss of principal stemming from failure to repay a contractual obligation. Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt.

Liquidity risk is the risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss. Liquidity risk is typically reflected in unusually wide bid-ask spreads or large price movements (especially to the downside).

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged

Call/prepayment risk is the risk associated with the early unscheduled return of principal on a fixed-income security. Some fixed-income securities, such as mortgage-backed securities, have embedded call options which may be exercised by the issuer, or in the case of a mortgage-backed security, the borrower.