Explain risk in various forms

Question

Explain risk in various forms.

Answer 1

Financial risk comes in various forms:

• Market risk: The possibility of loss because of movements in the market, either as complete or exact investments
• Credit risk: The possibility of loss because of default on a financial obligation
• Model risk: The possibility of loss because of errors in mathematical models, frequently models of derivatives. Because these models contain parameters, as volatility, we can also speak of parameter risk and volatility risk and many more.
• Operational risk: The possibility of loss because of people, procedures or systems. This has human error and fraud
• Legal risk: The possibility of loss because of legal action or the meaning of legal contracts

Before looking at the mathematics of risk we should understand the difference among risk, uncertainty and randomness, all of which are significant.