Knowra Financial risk management Financial risk management Financial risk management identifies, measures, and controls exposures that could cause financial losses. It combines analysis, limits, hedging, and other controls to keep risk within chosen tolerances.
Value at Risk : A statistical estimate of the loss a portfolio may exceed over a specified horizon at a chosen confidence level. It summarizes market-loss exposure in a single measure used for limits and reporting.
Market Risk : The possibility of loss caused by changes in market prices, rates, or other traded variables. It is the exposure most directly affected by movements in securities and commodity prices.
Derivative (finance) : A financial contract whose value depends on an underlying asset, rate, index, or event. Derivatives can transfer or reshape exposures, while introducing leverage and counterparty risk.
Risk Transfer : A strategy that shifts some financial exposure to another party through contracts or arrangements. It contrasts with retaining exposure and managing its consequences internally.
Expected Shortfall : A risk measure estimating the average loss in the tail beyond a specified confidence threshold. It captures the severity of losses that exceed a VaR threshold.
Credit Risk : The possibility of loss when a borrower or counterparty fails to meet financial obligations. It centers on default and deterioration in the ability or willingness to pay.
Asset-Liability Management : The coordinated management of an institution’s assets and liabilities to control financial risks. Banks and insurers use it to manage mismatches in timing, rates, and cash flows.
Risk Retention : The deliberate acceptance of a potential loss rather than transferring or avoiding its exposure. It is appropriate when losses are tolerable, controllable, or costly to transfer.
Stress Testing : An analysis of how a system or portfolio would perform under severe but plausible conditions. It tests vulnerabilities that ordinary probability-based estimates can miss.
Liquidity Risk : The possibility of loss from difficulty meeting obligations or trading assets without substantial cost. It links funding needs and market depth to potential financial loss.
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