Raman Kannan
rk2153@gmail.com
Market
Operational
Subjective and overlapping scope:
Settlement/credit are related.
Credit
Not an exhaustive list.
Legal
Liquidity
Ref: http://riskinstitute.ch/00007127.htm
rk2153 AT gmail DOT com [financial risk management] http://slideshare.net/rk2153
Types of Risk (II)
Credit -- risk of counterparty failure to make payments as required
Settlement risk – non delivery of cash or the asset – inability to complete
the transaction
Liquidity – cannot be converted into cash at fair market price
Market – investment will decrease in value due to changes in the market
Currency – associated with exchange rate moves that affect the
investment adversely.
Roll – inability to roll into a comparable asset on maturity, at an
equal or at a favorable interest rate – reinvestment or
refinancing risk
Rate – interest rate moves that affect the investment adversely.
Event – exogenous event – shocks that affect the market adversely
Corporate – risk of bankruptcy or other conditions that financial obligations
cannot be met
Country – changes in political and economic conditions that affect the
market adversely
Fraud – ponzi scheme
Different asset classes are susceptible to different types of risks
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Other classifications
• Market Risk: The risk that market prices of securities held in a portfolio may fall
rapidly or unpredictably due to a variety of factors, including changing economic,
political or market conditions.
• Company Risk: The risk that the issuer’s earnings prospects and overall financial
position will deteriorate, causing a decline in the value of the security over short or
extended periods of time.
• Active Management Risk - The risk that poor securities selection by the Fund’s
investment adviser could cause the Fund to underperform its benchmark index or
mutual funds with similar investment objectives.
• Foreign Investment Risk - Foreign markets can be more volatile than the U.S. market
due to increased risks of adverse issuer, political, regulatory, currency, market or
economic developments and can result in greater price volatility and perform
differently from securities of U.S. issuers. This risk may be heightened in emerging or
developing markets.
• Emerging Markets Risk - The risk of foreign investment often increases in countries
with emerging markets. For example, these countries may have more unstable
governments than developed countries, and their economies may be based on only a
few industries. Because their securities markets may be very small, share prices may
be volatile and difficult to determine. In addition, foreign investors are subject to a
variety of special restrictions in many such countries.
• http://www.tiaa-cref.org/public/prospectuses/TCFIE_sumpro.pdf
http://upload.wikimedia.org/wikipedia/en/e/e1/Markowitz_frontier.jpg
rk2153 AT gmail DOT com [financial risk management] http://slideshare.net/rk2153
Division of Labor
• Return
– Investment Manager, PF Manager
– Generating revenue, alpha
• Risk
– Risk Manager, Risk Budget/Allocation Office
– Controlling revenue
– Protecting and Preserving the business
Risk Officer and PF Manager: it is a partnership.
http://meketagroup.com/documents/RiskParityWP_000.pdf