Video Notes: Risk Types and Risk Management Concepts

Vocabulary-style flashcards covering key risk concepts and risk measures from the video notes.

Risk

A condition in which there is a possibility of an adverse deviation from a desired outcome.

Credit risk

A type of financial risk referring to the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms.

Market risk

A type of financial risk involving the risk of losses arising from movements in market indicators such as equity prices, interest rates, exchange rates, or commodity prices.

Interest rate risk

A type of market risk arising from the exposure to changes in interest rates, such as yields or treasury rates.

Foreign exchange risk

A type of market risk arising from exposure to changes in exchange rates.

Equity price risk

A type of market risk referring to the exposure of a company’s earnings and financial conditions to adverse movements in equity prices, such as in a portfolio of stocks.

Commodity price risk

A type of market risk in which fluctuations in commodity prices have direct impacts on a company, such as rising oil prices increasing the cost of energy.

Liquidity risk

A type of settlement risk that results from the inability of a counterparty to settle a transaction because of lack of liquidity. It includes funding liquidity risk, market liquidity risk, intraday liquidity risk, and contingent liquidity risk.

Funding liquidity risk

A type of liquidity risk arising from not being able to meet financial obligations due to lack of liquid funds.

Market liquidity risk

A type of liquidity risk arising when the disposal of securities in the market incurs unnecessary losses.

Contingent liquidity risk

A type of liquidity risk referring to the inability to fulfill sudden contingent obligations from clients.

Intraday liquidity risk

A type of liquidity risk occurring when a financial institution fails to meet its obligations at the expected time.

Operational risk

A type of financial risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events.

Interest rate risk

A type of market risk arising from changes in interest rates.

Foreign exchange risk

A type of market risk arising from changes in exchange rates.

Settlement risk

A type of operational risk arising from the possibility of the failure of a counterparty to settle a transaction that has been agreed upon.

Regulatory risk

A type of operational risk referring to losses due to changes in the regulatory environment, including the tax system and accounting system.

Reputational risk

A financial risk of incurring losses because of the loss or downgrading of the reputation of firms and individuals.

Risk management process

Defined by ISO 31000 as coordinated activities to direct and control an organization with regard to risk.

Risk measure

A mapping from a set of risk random variables to the real numbers, summarizing uncertainty into a single figure for decision-making.

Average loss

A type of risk measure that calculates the expected value of possible losses, giving the typical loss one can expect on average.

Maximum possible loss

A type of risk measure that identifies the worst-case loss scenario among all possible outcomes.

Standard deviation of loss

A type of risk measure that captures how much actual losses differ from the average loss, measuring variability.

Standard deviation

A general statistical measure of variability that reflects the extent to which values deviate from the mean.

Coherent risk measure

A type of risk measure that satisfies the properties of subadditivity, monotonicity, positive homogeneity, and translation invariance.

Subadditivity

A property of a coherent risk measure meaning that the risk of two risks combined will not be greater than the sum of the risks separately, reflecting a diversification benefit.

Diversification benefit

The reduction in overall risk arising from combining risks, as reflected by the subadditivity property of coherent risk measures.

Monotonicity

A property of a coherent risk measure meaning that if one risk always has greater losses than another under all circumstances, its risk measure should also be greater.

Positive homogeneity

A property of a coherent risk measure meaning that scaling a risk by a positive constant scales its risk measure by the same constant.

Translation invariance

A property of a coherent risk measure meaning that adding a certain fixed amount to losses simply increases the risk measure by that amount, without creating new uncertainty.

Value-at-risk (VaR)

A type of risk measure that, at a given confidence level, identifies the worst loss over a target horizon that will not be exceeded with that confidence.

Tail Value-at-risk (TVaR)

A type of risk measure that represents the average of all losses beyond the Value-at-Risk at a given confidence level; also called Conditional Tail Expectation, Expected Shortfall, or Conditional Value-at-Risk.

Mean excess loss function

A type of risk measure that gives the expected value of losses exceeding a threshold t, defined as eX(t) = E(X − t | X > t).

Financial risk

Refers to monetary losses from business or investment choices due to a number of factors.