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FRM Intro
Term | Definition |
---|---|
Risk | Risk is volatility of unexpected outcomes. It is the potential for the occurrence of a loss, but cannot be separated from growth opportunities. |
Business risk vs. Financial Risk | Business Risk: deliberate and necessary (e.g. business decisions) Financial risk: Losses due to financial market activities (e.g. interest rate exposure, default on financial obligations |
Financial risk management | Is the design and implementation of procedures for identifying, measuring and managing financial risk |
Major financial risk types | Market risk, Credit Risk, Operational Risk, Investment risk |
Market risk and Liquidity risk | Asset-Liquidity (market liquidity) Funding-Liquidity (cash flow) |
Credit risk | Default, credit deterioration (downgrade) |
Operational risk | Internal processes, Model risk, people risk, Legal risk |
VaR | Summarizes the worst loss over a target horizon that will not be exceeded with a given level of confidence. P(L >VaR) <=5% for c=95% P(L >VaR) <=1% for c=99% |