1. Value at risk, creditvalue adjustment, liquidity risk, Baselratios, financial
instruments like mmf, CP, CD, Tbills, derivatives, yield curve, libor, basel 3 and
its 3 pillars, counterparty credit risk, basic of marketrisk
Value at risk DEFINITIONof 'Value At Risk - VaR'
A statistical technique used to measure and quantify the level of financial
risk within a firm or investment portfolio over a specific time frame.Value
at risk is used by risk managers in order to measure and control the level
of risk which the firm undertakes. The risk manager's job is to ensure
that risks are not taken beyond the level at which the firm can absorb the
losses of a probable worst outcome.
INVESTOPEDIAEXPLAINS'Value At Risk - VaR'
Value at Risk is measured in three variables: the amount of potential
loss, the probability of that amount of loss, and the time frame. For
example, a financial firm may determine that it has a 5% one month
value at risk of $100 million. This means that there is a 5% chance that
the firm could lose more than $100 million in any given month.
Therefore,a $100 million loss should be expected to occur once every
20 months.
Credit value Portfolio:-
Credit valuation adjustment (CVA) is the difference between the risk-free
portfolio value and the true portfolio value that takes into accountthe possibility
of a counterparty’s default. In other words, CVA is the market value of
counterparty credit risk.
Credit risk refers to the risk that a borrower will default on a debt by failing to
make required payments.[1] In the first resort, the risk is that of the lender and
includes lost principal and interest, disruption to cash flows, and increased
collection costs. The loss may be complete or partial and can arise in a number
of circumstances.[2] For example:
A consumer may fail to make a payment due on a mortgage loan, credit
card, line of credit, or other loan.
A company is unable to repay asset-secured fixed or floating charge debt.
A business or consumer does not pay a trade invoice when due.
A business does not pay an employee's earned wages when due.
2. A business or government bond issuer does not make a payment on a
couponor principal payment when due.
An insolvent insurance company does not pay a policy obligation.
An insolvent bank won't return funds to a depositor.
A government grants bankruptcy protection to an insolvent consumer or
business.
Liquidity Risk:- In finance, liquidity risk is the risk that a given security
or asset cannot be traded quickly enough in the market to prevent a loss
(or make the required profit).
Types of liquidity risk[edit]
Marketliquidity – An asset cannot be sold due to lack of liquidity in the
market – essentially a sub-set of market risk.[1] This can be accounted for by:
Widening bid/offer spread
Making explicit liquidity reserves
Lengthening holding period for VaR calculations
Funding liquidity – Risk that liabilities:
Cannot be met when they fall due
Can only be met at an uneconomic price
Can be name-specific or systemic[1]
Financial instruments aretradableassets of any kind. They can be cash,
evidence of an ownership interest in an entity, or a contractual rightto receive
or deliver cash or another financial instrument.
Types[edit]
Financial instruments can be either cash instruments or derivative instruments:
Cash instruments —instruments whosevalue is determined directly by
the markets. They can be securities, which are readily transferable, and
instruments such as loans and deposits, whereboth borrower and
lender have to agree on a transfer.
Derivativeinstruments —instruments which derive their value fromthe
value and characteristics of one or more underlying entities such as an
3. asset, index, or interest rate. They can be exchange-traded derivatives
and over-the-counter (OTC) derivatives.[2
Money Market Fund:- An investment whose objective is to earn interest for
shareholders while maintaining a net asset value (NAV) of $1 per share. A
money market fund’s portfolio is comprised of short-term (less than one year)
securities representing high-quality, liquid debt and monetary instruments.
Investors can purchase shares of money market funds through mutual funds,
brokerage firms and banks.
1. CommercialPaper
2. DEFINITIONof 'CommercialPaper' An unsecured,
short-term debt instrument issued by a corporation,
typically for the financing of accounts receivable,
inventories and meeting short-term liabilities. Maturities
on commercialpaper rarely range any longer than 270
days.
DEFINITIONof 'Certificate Of Deposit - CD' A savings certificate entitling
the bearer to receive interest. A CD bears a maturity date, a specified
fixed interest rate and can be issued in any denomination. CDs are
generally issued by commercialbanks and are insured by the FDIC
DEFINITION of 'Treasury Bill - T-Bill'
A short-term debtobligation backed by the U.S. government with a maturity of
less than one year. T-bills are sold in denominations of $1,000 up to a maximum
purchase of $5 million and commonly have maturities of one month (four
weeks), three months (13 weeks) or six months (26 weeks).
T-bills are issued through a competitive bidding process ata discount from par,
which means that rather than paying fixed interest payments like conventional
bonds, the appreciation of the bond provides the return to the holder.
INVESTOPEDIA EXPLAINS'Treasury Bill - T-Bill'
For example, let's say you buy a 13-week T-bill priced at $9,800. Essentially,
the U.S. government (and its nearly bulletproof credit rating) writes you an IOU
for $10,000 that it agrees to pay back in three months. You will not receive
regular payments as you would with a couponbond, for example. Instead, the
appreciation - and, therefore, the value to you - comes from the difference
between the discounted value you originally paid and the amount you receive
4. back ($10,000). In this case, the T-bill pays a 2.04% interest rate ($200/$9,800
= 2.04%) over a three-month period.
DEFINITION of 'Yield Curve'
A line that plots the interest rates, at a set point in time, of bonds having equal
credit quality, but differing maturity dates. The most frequently reported yield
curve compares the three-month, two-year, five-year and 30-year U.S. Treasury
debt. This yield curve is used as a benchmark for other debt in the market, such
as mortgage rates or bank lending rates. The curve is also used to predict
changes in economic output and growt.
Curve betweenYield and Maturity
DEFINITION of 'Counterparty Risk'
The risk to each party of a contractthat the counterparty will not live up to its
contractual obligations. Counterparty risk as a risk to both parties and should be
considered when evaluating a contract.
In most financial contracts, counterparty risk is also known as "default risk".
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Marketrisk is the risk of losses in positions arising from movements in market
prices.[1]
Some market risks include:
Equity risk, the risk that stock or stock indices (e.g. Euro Stoxx 50, etc. )
prices and/or their implied volatility will change.
Interest rate risk, the risk that interest rates (e.g. Libor, Euribor, etc.)
and/or their implied volatility will change.
Currency risk, therisk that foreign exchange rates (e.g. EUR/USD,
EUR/GBP, etc.) and/or their implied volatility will change.
Commodity risk, the risk that commodity prices (e.g. corn, copper, crude
oil, etc.) and/or their implied volatility will change
DEFINITION of 'Financial Instrument'
A real or virtual document representing a legal agreement involving some sort
of monetary value. In today's financial marketplace, financial instruments can
5. be classified generally as equity based, representing ownership of the asset, or
debt based, representing a loan made by an investor to the owner of the asset.
Foreign exchange instruments comprise a third, unique type of instrument.
Different subcategories of each instrument type exist, suchas preferred share
equity and common share equity, for example.