Definitions: Top-10 List of Risk Categories
July 28, 2006
Some risk definitions, and a Top-10 List of “Risk Categories”, thinking of risk as a spectrum from political to economic to business/finance…
*The possibility of suffering harm or loss; danger.*A factor, thing, element, or course involving uncertain danger; a hazard.*The danger or probability of loss to an insurer; the amount that an insurance company stands to lose.*The variability of returns from an investment; the chance of nonpayment of a debt.
1. Risk = If outcomes will occur with known or estimable probability the decision-maker faces a risk; certainty is a special case of risk in which this probability is equal to zero or one.
2. At Risk = Exposed to the possibility of loss.
Top-10 List of “Risk” Categories
1. Political/Country: The potential volatility of foreign stocks, or the potential default of foreign government bonds, due to political and/or financial events in the given country.
2. Legislative: The risk that a new law or a change in an existing law could have a significant impact on an investment.
3. Regulatory: The risk associated with the potential for laws related to a given industry, country, or type of security to change and impact relevant investments.
4. Business: Risk associated with the unique circumstances of a particular company, as they might affect the price of that company’s securities.
5. Economic: In financing a project, the risk that the project’s output will not generate sufficient revenues to cover operating costs and to repay debt obligations.
6. Market: Risk which is common to an entire class of assets or liabilities; the value of investments may decline over a given time period simply because of economic changes or other events that impact large portions of the market.
7. Currency/Exchange Rate: The risk that a business’ operations or an investment’s value will be affected by changes in exchange rates.
8. Credit/Default: The possibility that a bond issuer will default, by failing to repay principal and interest in a timely manner.
9. Event: The likelihood that the rating of a bond will drop due to an event, such as the taking on of additional debt or a recapitalization by a company.
10. Systemic: Risk that affects an entire financial market or system, and not just specific participants.
11. Operation: Risk associated with the potential for systems failure in a given market.
