Financial Risk Manager

Ways of Financial and Risk Management

Types of Financial Risk
Thursday, August 6, 2009

Market Risk:

Risk of declining prices or volatility of prices in the finacial markets will result a loss. There are two types of market risk inculding Absolute Risk and Relative Risk. Withing the market risk following risks are of importance.

- Absolute Risk

- Relative Risk

- Directional Risk (Linear risk exposure)

- Non directional Risk (Non linear risk exposure)

- Basis Risk

- Volatility Risk

Liquidity Risk:

Risk of loss due to inadequate liqudity of position / asset at a fair price. Risks withing the liquidity risk are

- Asset Liquidity Risk

- Funding Liquidity Risk

Credit Risk:

Risk of loss due to dafaul of counterpart in a financial transaction. Important terms and further classess of risks under credit risk are

- Exposure

- Recovery Rate

- Credit Event

- Sovereign Risk

- Settlement Risk

Operational Risk:

Risk of loss due to inadequate monitoring system, management failure, defective controls, frauds and human errors. This risk is particulary relevant to DERIVATIVE TRADING, because derivatives are inherently higly leveraged instrument, which enable tradters to expose a firm to loss using relativly small amount of capital. Following are the classes of operational risk

- Model Risk

- People Risk

- Legal Risk

Labels: Foundation of Risk Management, FRM, Risk