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Types Of Risk

14 Sep 2019

Types Of Risk

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Risk is defined as the probability of suffering a loss.

Financial risks are losses due to financial market activities. For example – losses due to price movements or defaults on financial obligations et al.

Credit risk is the risk of default by a borrower in financial transaction.

Market risk is the risk of losses in positions arising from movement in market prices.

Operational risk is the risk of loss due to inadequate monitoring systems, fraud, human errors, system errors, management failures. It arises from deficiencies at either technical level or at organizational level.

Liquidity risk is the risk of running out of cash or inability to liquidate a position at fair price.

Asset liquidity risk refers to a transaction that cannot be made at prevailing market prices owing to the large size of position. Also called as market/trading liquidity risk.

Funding liquidity risk is the risk that an institution unable to meet payment obligations or to fund ongoing operations.

Volatility risk is the risk of losses from changes in actual or implied volatility of market prices.

Interest rate risk is the risk of loss occurred due to changes in interest rate. Changes in interest rate affect both assets and liabilities.

Inflationary risk refers to the risk that inflation will erode an investment’s return through a decline in purchasing power.

Country risk refers to the inability or unwillingness of borrowers within a country to meet their obligations across borders.

Sovereign risk is the risk resulting from a country’s actions. It refers to the risk of default by sovereign government on its foreign currency obligations and its impact on other entities within the country to meet their foreign currency debt obligations.

Economic risk refers to the likelihood that macroeconomic conditions results in significant loss for a business. These conditions include high inflation, exchange rates fluctuations, change in government policy and regulations or economic sanctions et al.

Political risk is the risk related to political change or instability.

Transfer risk is the risk associated with currency conversion from the money of one nation to another.

Exchange rate risk is a risk that arises from change in price of one currency against other. It is also known as currency risk.

Settlement risk is the risk that a counterparty will fail to deliver its financial obligation after the party has made its delivery.

Model Risk is defined as the potential loss an institution may incur, as a consequence of decisions that could be principally based on the output of internal models, due to errors in the development, implementation or use of such models. It is the risk of error in estimated risk measures due to inadequacies in risk models.

People risk refer to the risk associated with fraud committed by internal employees or external individuals.

Legal risk is the risk of loss in value due to legal issues such as lawsuits, penalties, fines or damages.

Regulatory risk is associated with the changes to laws and regulations that adversely impact business or investment.

Reputational risk is the risk of loss resulting from the destruction to firm’s reputation. Reputation can be defined as a market perception for management and the financial stability of firm.

Internal risk is the risk arising from within the organization. Internal risk is typically generated by employees, technology used, operational factors.

External risk is the risk arising from outside the organization. External risk is typically generated by economic, environmental, political factors.

Directional risk are linear risk exposures to changes in economic or financial variables.

Non-directional risk are non-linear risk exposures to changes in economic or financial variables.

Systematic risk is the risk that affects the entire market, not just a specific stock or industry. It is also known as un-diversifiable risk or market risk.

Unsystematic risk is the risk unique to the specific firm or industry. It is also known as diversifiable risk, residual risk or specific risk.

Solvency risk refers to the risk of having insufficient capital to cover losses generated by all types of risks.

 

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