Risk and types of Financial Risk Essay -- Business, Banks, Insurance

Value at bump-IntroductionAs Walter Wriston, causality chairman of Citigroup, said All of life is the management of take chances, not its evacuation and nowadays modern banking is ab come forward controlling riskinessiness and returns. The ability of a m geniustary institution to control risk is a recognise actor that determines its success or its failure in markets. As the late financial crisis has demonstrated institutions that were not flop prepared to face the crisis, failed and they were each bailed out by governments or serve economists as bad example. This is the reason risk management is an classic field of every financial institution.-Risk and types of Financial RiskAs Philippe Jorion (2007) mentions a definition for risk can be the excitability of unanticipated outcomes and can be created by natural disasters, much(prenominal) as the recent earthquake in Japan that is reported to cause a drop of 3% of the oil price in the first hardly a(prenominal) days after it, or it can created by human activities such as technological innovation which might create unemployment. Phillip Best (1998) argues that risk matters only when it causes financial impairmentes and financial risk is the one link with financial assets and portfolios and is classified in broader categories market risk, credit risk, runniness risk and operational risk. There is evidence that these types of risk can affect one another. Market risk is the one linked with the movements of the price level of market. honorable mention risk is generated when parties involved in an economic contract are either incapable or reluctant to satisfy their commitments. Jorion (2007) classifies liquidity risk into 2 forms asset liquidity risk and funding liquidity risk. Jorion (2007, p. 23)Asset liquidity riskarises when a transaction can... ... effects than those expected. Nevertheless VaR is ever so a statistical tool, meaning that if using VaR is estimated a loss of 10 millions in one mon th, it is known that there might be months with smaller losses and months with larger than 10 millions. There is also the problem of identifying the right method because each method has its own strengths and weaknesses.So it is important for a risk manager to be able to identify the key factors of the market. These can be market rates and prices that can affect the portfolio and the compulsion of this derives from the fact that without these factors is impossible to build a proper quantitative beak of market risk, due to the complexity of financial markets. So to start properly one has to recognize the instruments through which market risk factors will be embodied, such instruments may be options, swaps or loans.