What is Risk ?
Risk is the potential harm that may arise from
some present process or from some future event.
It is often mapped to the probability of some
event which is seen as undesirable. Usually the
probability of that event and some assessment of
its expected harm must be combined into a
believable scenario (an outcome) which combines
the set of risk, regret and reward probabilities
into an expected value for that outcome.
:: The potential for unexpected events to occur , or expected events not to occur ,either of which can precipitate adverse outcomes.
:: A measurable possibility of losing capital (or not gaining value). The chance that invested capital will drop in value can be caused by many factors including, inflation, interest rates, default, politics, liquidity, call provisions, etc.
:: In futures trading Risk, is the probability of loss of trading capital. Market risk may be one of the things considered by fundamental traders but it is not all of it. Market risk if it exists in futures, may not be considered at all by technical traders who base there decisions on price action. Prices move first and fundamentals come second.
:: Market Risk
:: 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. Asset allocation and diversification can protect against market risk because different portions of the market tend to under perform at different times. also called systematic risk.
:: Market risk is the risk that the value of your investment will decrease due to moves in market factors. The four standard market risk factors include:
1:-
Equity risk, or the risk that stock prices will
change.
2:- Interest rate
risk, or the risk that interest rates will
change.
3:- Currency risk,
or the risk that foreign exchange rates will
change.
4:- Commodity risk,
or the risk that commodity prices (i.e. grains,
metals, etc.) will change.
Sometimes, a fifth risk factors is also
considered:
5:- Equity index risk, or the risk that stock or other index prices will change adversely.
:: Risk management
:: Risk management is the decision-making process involving considerations of political, social, economic and engineering factors with relevant risk assessments relating to a potential hazard so as to develop, analyze and compare regulatory options and to select the optimal regulatory response for safety from that hazard. Essentially risk management is the combination of three steps: risk evaluation; emission and exposure control; risk monitoring.
:: Process of identifying, assessing, and reducing the risk to an acceptable level and implementing the right mechanisms to maintain that level of risk.
:: The process by which organization ensure that the risk to which they are actually exposed are the risks to which they need to be exposed to pursue their primary objectives.
:: why bother setting up a risk measurement system ?
Required to make risk-taking profitable.
:: where dose it fit ?
First identify , then measure , and then manage risk.
:: How to measure risk ?
Finding a balance between history and future scenarios.
:: Risk management Methodology
Market risk is typically measured using a Value at Risk methodology.
:: Value at Risk (“VAR”) is defined as the maximum possible loss which may be incurred by a portfolio, at a given time horizon and at a given level of confidence. Consequently, VAR can be viewed as a measure of risk exposure for banks and financial intermediaries.
:: Measures the worst expected loss over a given time interval under normal market conditions at a given confidence level.
:: Value At Risk. A technique which uses the statistical analysis of historical market trends and volatilities to estimate the likelihood that a given portfolio's losses will exceed a certain amount.
VaR can play three important roles within exchanges:
1:- It allows risky positions to be directly compared and aggregated.
2:- It is a measure of the margins required to support a given level of risk activities.
3:- It can also be used to develop trading strategies based on risk and return.
Risk Metrics® measures volatility using Exponentially weighted moving average. It is very simple to implement. The volatility at the end of day , is estimated using the previous volatility estimate and the return observed during the day.