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.
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
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
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
posted @ 12:52 PM,
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Risk and Major Sources of Risk
Risk:
Risk is an unexpected variablity of asset prices and earning. There are two major sources of risk;
1. Business Risk:
is the risk that a firm is subjected to during daily operations and includes the risks that result from business decisions and the business environment. Business risk includes Strategic Risk and Macro Economic Risk.
Stretegic risk reflects risks inherent in the decision of senior management setting a business strategy. Macro Economic Risk is inherent with the overall economic condition of the region and it has an impact over firm's operation and sales. One of the examples of business risk is that the economy will slow and demand for a product will fall.
2. Financial Risk:
is the result of a firm's financial market activities. Like interest rate movement after the issuance of floating rate bonds. In this case the issuing firm will be negatively impacted if market reates increase.
Risk is an unexpected variablity of asset prices and earning. There are two major sources of risk;
1. Business Risk:
is the risk that a firm is subjected to during daily operations and includes the risks that result from business decisions and the business environment. Business risk includes Strategic Risk and Macro Economic Risk.
Stretegic risk reflects risks inherent in the decision of senior management setting a business strategy. Macro Economic Risk is inherent with the overall economic condition of the region and it has an impact over firm's operation and sales. One of the examples of business risk is that the economy will slow and demand for a product will fall.
2. Financial Risk:
is the result of a firm's financial market activities. Like interest rate movement after the issuance of floating rate bonds. In this case the issuing firm will be negatively impacted if market reates increase.
Labels: Foundation of Risk Management, FRM, Risk
posted @ 9:24 AM,
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