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Types of Risks in Finance

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Market Risk

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The risk of losses due to changes in market prices. Example: A decline in the stock market causes a portfolio value to drop.

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Strategic Risk

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The risk that arises from adverse business decisions or improper implementation. Example: A failed product launch due to inadequate market research.

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Inflation Risk

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Risk that the value of assets or income will be eroded as inflation shrinks the value of a currency. Example: Cash savings losing purchasing power over time.

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Environmental Risk

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Risk resulting from environmental disasters or changes in environmental regulations. Example: A company incurs fines due to non-compliance with environmental laws.

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Foreign Exchange Risk

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Risk of loss from fluctuating foreign currency exchange rates. Example: A U.S. investor in European stocks losing value due to a stronger dollar against the euro.

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Systemic Risk

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The risk of collapse of an entire financial system or entire market. Example: The 2008 financial crisis resulting from the collapse of major financial institutions.

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Operational Risk

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Risk arising from execution of a company's business functions. Example: Losses from failed internal processes or systems.

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Interest Rate Risk

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Risk of loss from changes in interest rates. Example: The value of a bond investment falls as interest rates rise.

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Counterparty Risk

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The risk that the other party in an investment, trading or financial transaction may default on their obligation. Example: A swap counterparty fails to honor the agreement.

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Business Risk

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Risk associated with a firm's operating income and its ability to meet operating expenses. Example: A company unable to cover its operating costs due to a decrease in sales.

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Political Risk

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The risk of loss from political instability or changes in a country's government policies. Example: Investments in a country are negatively impacted when it undergoes a political coup.

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Volume Risk

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The risk of loss due to the change in volume of goods or services sold. Example: A decline in demand leading to reduced sales volume and revenue.

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Reputation Risk

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The risk of loss resulting from damages to a firm's reputation. Example: A scandal leading to a boycott of a company's products.

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Credit Risk

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The risk that a borrower will default on any type of debt. Example: A bond issuer fails to make a payment.

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Liquidity Risk

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The risk stemming from the lack of marketability of an investment. Example: Difficulty in selling a large position in an illiquid stock without affecting its price.

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Sector Risk

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Risk arising from the economic downturn in a particular industry or sector. Example: An investment in the technology sector declines due to new regulations affecting tech companies.

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Compliance Risk

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The risk of legal or regulatory sanctions. Example: A fine for failing to follow new financial regulations.

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Country Risk

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Risk of investing or doing business in a specific country due to changes in the business environment. Example: New tax laws in a foreign country negatively impacting profits.

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Legal Risk

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Risk of financial loss due to legal proceedings or contract disputes. Example: A lawsuit against a company results in significant legal costs and settlements.

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Model Risk

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The risk of inaccuracy in models used for valuing, pricing, and managing risk. Example: Mispricing derivatives due to incorrect assumptions in the pricing model.

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