303 entries
Risk
Types of risk and how they are measured — VaR, CVaR, expected shortfall, stress testing, hedging.
- D-SIB vs G-SIB Capital Requirements D-SIB vs G-SIB capital requirements: how domestic and global surcharges stack and identify systemically important banks.
- Delta Hedging Explained With an Example Delta hedging is a technique to neutralize directional risk in options by matching the delta exposure of the option with an offsetting stock position. Here is how it works with a concrete example.
- Delta-Normal VaR Linear approximation method for value-at-risk assuming normal distribution of returns
- Demographic Risk Long-run liability mismatches in pension and insurance portfolios driven by unexpected longevity or mortality trends.
- Deposit Guarantee Scheme Coverage Limits Explained Understand how deposit guarantee scheme coverage limits protect bank deposits, what assets are excluded, and how joint accounts affect insurance.
- Distortion Risk Measure A risk quantification framework that applies a distortion function to loss probabilities to capture tail risk and model market-implied pricing.
- Dividend Restrictions When CET1 Falls Below Buffer Thresholds Understand the Maximum Distributable Amount rule that restricts dividends, buybacks, and bonuses when a bank's CET1 ratio falls into the combined buffer requirement.
- Dividend Risk Hedging Managing uncertainty in dividend streams for pricing derivatives and managing equity exposure.
- Downside Deviation vs Standard Deviation in Risk Measurement Downside deviation measures only negative returns below a target, while standard deviation captures all volatility. Learn when each metric matters most.
- Downside Risk vs Total Risk Learn why standard deviation penalizes upside as much as downside, and how downside-only metrics like semi-deviation and Value at Risk focus on the losses that actually hurt investors.
- Drawdown Analysis Measuring the peak-to-trough decline in a portfolio's value over time, a key risk metric for assessing downside volatility.
- Drawdown Risk Measures Peak-to-trough declines used to assess portfolio performance volatility and loss severity.
- Duration Hedging Matching the duration of assets and liabilities to immunise a portfolio against parallel shifts in the yield curve.
- Dynamic Hedging Continuously rebalancing hedges as underlying prices shift to maintain delta neutrality and lock in option profit.
- Dynamic Hedging vs Static Hedging Dynamic hedges are continuously rebalanced to adjust to changing prices; static hedges are set once and held. Each approach has different costs, risks, and optimal use cases.
- Entropy as a Risk Measure in Finance Entropy as a risk measure captures distributional uncertainty in finance beyond variance. Learn how information-theoretic entropy quantifies tail risk and model ambiguity.
- Equity Hedging Risk management techniques to reduce downside exposure in stock portfolios while preserving upside, typically via puts, shorts, or derivatives.
- Event Risk The discrete loss potential from one-off corporate or market events such as takeovers, credit rating shocks, or disasters, distinct from continuous market fluctuation.
- Event Risk in Bond Portfolios Learn how sudden credit events like LBOs and ratings downgrades create event risk in bond portfolios, causing price gaps duration cannot predict.
- Event Risk in Bonds Event risk bonds refers to sudden shocks—LBOs, downgrades, defaults—that sharply deteriorate an issuer's credit quality, distinct from gradual migration.
- Event-Driven Hedging Purchasing protective derivatives ahead of known discrete events that create price uncertainty.
- EWMA Volatility Model Explained Learn the EWMA volatility model—exponential weighting, how lambda is chosen, how it compares to simple historical volatility, and its role in risk measurement.
- Execution Risk The risk that a trade cannot be executed at its intended price, size, or timing, due to market depth, liquidity constraints, or operational delays.
- Expected Loss Model A framework for measuring credit risk by combining the probability of borrower default, the amount exposed at default, and the loss if default occurs.
- Expected Shortfall Expected shortfall is the average loss a portfolio incurs in scenarios worse than the value-at-risk threshold — the mean loss of tail outcomes, also called conditional value-at-risk.
- Exposure at Default The outstanding credit exposure when a counterparty defaults; a critical input for assessing credit risk and regulatory capital.
- Extension Risk Extension risk is the danger that a borrower will hold a loan or mortgage longer than expected when interest rates rise, forcing the lender to remain locked into a low coupon while rates elsewhere have increased.
- Extension Risk in Fixed Income How rising interest rates slow prepayments and extend the effective duration of callable bonds and mortgage-backed securities beyond expectations.
- Extremal Value Theory Statistical framework for modeling the probability and magnitude of rare extreme events in financial markets.
- Fair Value Hedge Derivative strategy that offsets changes in the fair value of a recognised asset, liability, or firm commitment.
- Fat Tail Measurement Quantifying the probability of extreme returns beyond normal distribution assumptions.
- Fat Tails and Kurtosis in Financial Risk Models How excess kurtosis and fat-tail distributions make VaR models dangerously optimistic and why practitioners must adjust for heavy tails.
- Fat-Tail Risk Fat-tail risk is the exposure that financial markets have more extreme price movements than normal statistical distributions would predict, with thicker tails and more frequent outliers.
- Franchise Risk The erosion of a financial firm's competitive moat when customers and counterparties lose confidence in its stability or reputation.
- Funding Liquidity Risk The risk that a firm cannot raise new funds or roll over debt to meet short-term obligations as they come due.
- Funding Liquidity Risk vs Market Liquidity Risk Funding liquidity risk vs market liquidity risk: inability to raise cash for obligations versus inability to sell assets at fair prices.
- G-SIB Surcharge An additional capital requirement imposed on globally systemically important banks, calibrated by five systemic-risk indicators including asset size, interconnectedness, and complexity.
- Gamma Hedging Rebalancing a delta-neutral portfolio to keep it hedged as prices move, offsetting the decay or gain from gamma.
- Gamma Risk The risk that delta accelerates in large moves, forcing costly hedging or locking in losses on short options.
- Gap Risk The danger that an asset's price will jump sharply between trading sessions, bypassing stop-loss orders and leaving investors stranded at worse prices.
- Gap Risk in Leveraged Positions Gap risk in leveraged accounts: overnight or weekend price jumps can exceed stop-losses, causing losses larger than planned. Distinct from regular market risk.
- GARCH Models for Volatility Forecasting GARCH volatility forecasting captures how past price shocks and variance feed into future volatility, improving on fixed-window averages for risk models.
- Gray Swan A gray swan is a known, foreseeable catastrophic risk that is difficult to model or price accurately — something that could happen but is hard to assign a probability to.
- Headline Risk for Publicly Traded Companies How negative news and media coverage can move stock prices independent of fundamentals, and how headline risk differs from underlying business risk.
- Headline Risk vs Reputational Risk Headline risk is the immediate market price reaction to adverse news; reputational risk is the lasting erosion of brand trust and customer loyalty.
- Hedge Accounting Discontinuation Rules IFRS 9 and ASC 815 conditions that require or allow companies to stop hedge accounting, and the income-statement consequences of dedesignation.
- Hedge Effectiveness Testing Methods How companies test whether a hedge qualifies for accounting treatment under ASC 815 and IFRS 9 using dollar-offset, regression, and hypothetical-derivative methods.
- Hedge Ratio Calculation Explained Learn how to calculate hedge ratio—the fraction of a position to hedge using futures or options—with formulas and worked examples.
- Hedging a Bond Portfolio With Interest Rate Swaps How portfolio managers hedge bond portfolios with interest rate swaps to reduce duration risk and limit losses when rates rise.
- Hedging a Concentrated Stock Position Techniques to hedge concentrated stock exposure—collars, prepaid forwards, exchange funds, protective puts—without triggering immediate tax on unrealized gains.
- Hedging Equity Tail Risk With Variance Swaps Learn how institutional investors hedge tail risk with variance swaps to gain convex payoffs during volatility spikes and protect against severe market drawdowns.
- Hedging Foreign Currency Receivables How to lock in the domestic-currency value of a foreign-currency payment using forwards and options before the money arrives.
- Hedging Repatriation Risk for Multinationals Learn how multinational corporations hedge repatriation risk when converting and bringing home overseas profits, including netting centers, forward contracts, and dividend timing.
- Hedging with Futures vs Options: Key Differences Compare futures and options for hedging: cost, flexibility, and residual risk. Learn when to use each derivative to protect against market moves.
- Herstatt Risk Herstatt risk is the danger in foreign exchange transactions that one side will deliver currency while the other fails to deliver, named after Herstatt Bank which failed mid-settlement in 1974.
- Historical VaR Historical value-at-risk is a method of calculating the loss threshold by sorting actual historical returns and selecting the percentile corresponding to the confidence level, without assuming any particular distribution.
- Horizon Risk How the length of an evaluation period changes which risks dominate and their apparent magnitude.
- Horizon Risk in Investing Horizon risk is the danger that your investment timeline suddenly shortens, forcing you to liquidate assets at an inopportune time—regardless of their fundamental value.
- How Correlation Affects Portfolio Risk Correlation determines the diversification benefit of holding multiple assets. Only when correlation is below 1 does variance fall. See the math with examples.
- How Implied Volatility Signals Hedging Cost Implied volatility sets option premiums and hedging costs. Learn why protection is most expensive when investors most want it.
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