Fundamental Risk Concepts

Abstract

The term risk signifies the uncertainty of the future developments in risk factors (e.g., interest rate curves, stockprices, foreign exchange rates, volatilities, etc.) resulting in a negative deviation of the quantity of interest (e.g., the value of a portfolio) from a certain reference value. Or expressed in terms of a bank balance sheet, risk is the possibility that the value of assets decreases or that the value of liabilities increases. Among all the conceivable types of risk, for example, market risk, credit risk, operational risk, legal risk, etc., market risk and credit risk are those which are most commonly traded via various financial instruments.