Inflation risk or purchasing power risk arises because of the variation in the value of an asset’s cash flows due to inflation, as measured in terms of purchasing power. For example, if an investor purchases an asset that produces an annual return of 5% and the rate of inflation is 3%, the purchasing power of the investor has not increased by 5%. Instead, the investor’s purchasing power has increased by 2%. Inflation risk is the risk that the investor’s return from the investment in an asset will be less than the rate of inflation.
Common stock is viewed as having little inflation risk. For all but inflation protection bonds, an investor is exposed to inflation risk by investing in fixed-rate bonds because the interest rate the issuer promises to make is fixed for the life of the issue.
At the end of the business day the merchant’s processing bank takes all of the collected sales drafts and inputs them into its system. These are then combined with those advises collected electronically during the day to produce a file, in a format defined by the credit card network operator, and transmitted to the relevant network operator.
The network operator then combines together all of the sales advices from all of the merchant processing banks. These are then sorted by issuer bank. Each transaction in a foreign currency is converted into the issuing banks’ base currency. Individual files are then transmitted to each of the issuer banks.
The issuer bank then carries out basic validation checks on this data, checking that authorization codes are correct, for example, and that transactions received are not simply duplicates of others already received and processed. The issuer posts each transaction to the relevant individual cardholder’s account. It also generates payment instructions for each of the merchant banks that are owed payment. These are then settled though a clearing or payment system. The system used will depend on whether the issuer and merchant banks are in the same country or not.
When the transfer has cleared the merchant’s processing bank credits each of its merchants’ accounts with the requisite amount, less fees due. In this way the merchant is finally paid, usually within two to three working days of the actual purchase. This fast and guaranteed method of payment goes some way towards offsetting the fees charged. Responsibility for losses due to fraud lies with the issuer bank and cardholder, if the issuer bank authorized the payment, and with the merchant if no authorization was given. At the end of the billing period the issuer bank prepares and sends a statement of transaction activity to the cardholder.