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Fundamental Risk Concepts

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Risk

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The possibility of loss or any other adverse event with potential to interfere with the organization's operational or financial success.

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Risk Management

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The process of identifying, assessing, and controlling threats to an organization's capital and earnings.

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Inherent Risk

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The risk present in a situation or environment in absence of any actions to alter that situation.

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Residual Risk

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The risk that remains after all efforts to identify and eliminate risks have been made.

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Market Risk

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The risk of losses in positions arising from movements in market prices.

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Credit Risk

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The risk of loss arising from a borrower who does not make payments as promised.

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Operational Risk

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The risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.

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Liquidity Risk

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The risk that an entity will not be able to meet its financial obligations as they fall due because it cannot liquidate assets or obtain funding.

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Compliance Risk

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The risk of legal or regulatory sanctions, financial loss, or loss to reputation an organization may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organization standards, and codes of conduct.

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Strategic Risk

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The risk that arises from adverse business decisions or the failure to implement appropriate business strategies.

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Reputation Risk

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The risk of loss resulting from damages to a firm's reputation, incurring in lost revenue, increased operating, capital or regulatory costs, or destruction of shareholder value.

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Systemic Risk

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The risk of collapse of an entire financial system or entire market, due to the interlinkage and interdependencies of financial institutions and markets.

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Risk Appetite

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The amount and type of risk that an organization is willing to take in order to meet their strategic objectives.

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Risk Tolerance

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The degree of variability in investment returns that an individual or organization is willing to withstand in their investment portfolio.

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Risk Assessment

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The overall process or method where you identify risks and risk factors, assess their potential effects, and create plans to deal with them.

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Risk Mitigation

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The process of developing options and actions to enhance opportunities and reduce threats to project objectives.

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Risk Transfer

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Shifting the potential risk exposure to another party, typically through insurance or outsourcing.

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Risk Avoidance

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Taking actions to remove a risk entirely, often by discontinuing the activities that create the risk.

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Interest Rate Risk

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The possibility of a reduction in the value of a security or a portfolio of securities resulting from a rise in interest rates.

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Foreign Exchange Risk

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The risk of a financial transaction's value changing due to changes in currency exchange rates.

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Country Risk

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The risk of investing in a country; the possibility of losing money because of instability or changes in a country's environment.

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Political Risk

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The risk an investment's returns could suffer because of political instability or changes in a country's government policies.

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Value at Risk (VaR)

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A statistical technique used to measure and quantify the level of financial risk within a firm, portfolio, or position over a specific time frame.

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Risk Concentration

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The presence of a high level of exposure to a single risk or a group of related risks, potentially threatening the financial stability of an institution or system.

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Hedging

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The process of making an investment to reduce the risk of adverse price movements in an asset, typically by taking an offsetting position in a related security.

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