Financial risks faced by investors and financial institutions

Liquidity Risk
Inflation Risk
Interest Rate Risk
Credit Risk
In financial transactions arises from the possibility that any counterparty of the agreement may default. Buyers have uncertainty for their future cash flows because there is always a possibility of counterparty’s failure to meet its obligations.
Risk that arises from changes in interest rate yield curves. Financial instruments are closely linked to interest rate curves.
Refers to the ability that companies, investors, banks, governments e.tc to meet their payment obligations in time. It varies by the passage of time depending on its maturity, issuers’ financial stability, trend of the economy even hopes and rumors.
Credit Risk
Risk that can manipulate the power of money. Inflation usually arises from oversupply in the economy, macroeconomic factors such as monetary policy of central banks which controls the money supply, but also from other unexpected factors such as wars and political decisions.
Country Risk
Basis Risk
Currency Risk
Credit Risk
Operational Risk
Risk which results in severe losses due to situations where corporate’s procedures fail to work as it would (process mistakes, employer practices, workplace safety etc.).
Resulting from engagements in financial transactions which take place in another currency than the official currency of the country / union the investor is based.
May emerge in portfolio whose investments take place at a specific country. The reason is that investments are highly correlated and dependent on internal political or financial issues.
Emerges in transactions with future derivatives. Futures are used for hedging against price movements in the future but also for speculating. Basis risk is the difference between the spot price and future price =(St−Ft). of the asset any time during the future’s life.
Major Risk Measures used in Portfolio Optimization and associated Mathematical Formulations of the Optimization Models (1/3)
Chapter II
The use of a single risk measure should not dominate financial risk management. Each risk measure offers its own advantages and disadvantages, complementing a risk measure with one other represents an effective way to provide more comprehensive risk monitoring.