1.

Interest Rate Risk

Interest rate risk is the potential for investment losses that result from a change in interest
rates. If interest rates rise, for instance, the value of a bond or other fixed-income investment
will decline. The change in a bond's price given a change in interest rates is known as its
duration.

Interest rate risk can be reduced by holding bonds of different durations, and investors may also
allay interest rate risk by hedging fixed-income investments with interest rate swaps, options, or
other interest rate derivatives.

 Interest rate risk is the potential that a change in overall interest rates will reduce the value of
a bond or other fixed-rate investment:
 As interest rates rise bond prices fall, and vice versa. This means that the market price of
existing bonds drops to offset the more attractive rates of new bond issues.
 Interest rate risk is measured by a fixed income security's duration, with longer-term bonds
having a greater price sensitivity to rate changes.
 Interest rate risk can be reduced through diversification of bond maturities or hedged using
interest rate derivative

2. Foreign Exchange Risk

risk refers to the losses that an international financial transaction may incur due to currency
fluctuations. Also known as currency risk, FX risk and exchange-rate risk, it describes the
possibility that an investment’s value may decrease due to changes in the relative value of the
involved currencies. Investors may experience jurisdiction risk in the form of foreign exchange
risk.

 Foreign exchange risk refers to the losses that an international financial transaction may incur
due to currency fluctuations.
 Foreign exchange risk can also affect investors, who trade in international markets, and
businesses engaged in the import / export of products or services to multiple countries.
 Three types of foreign exchange risk are transaction, translation, and economic risk.

3. Market Risk
Market risk is the possibility of an investor experiencing losses due to factors that affect the
overall performance of the financial markets in which he or she is involved. Market risk, also
called "systematic risk," cannot be eliminated through diversification, though it can be hedged
against in other ways. Sources of market risk include recessions, political turmoil, changes in
interest rates, natural disasters and terrorist attacks. Systematic, or market risk tends to
influence the entire market at the same time.
 This can be contrasted with unsystematic risk, which is unique to a specific company or industry.
Also known as “nonsystematic risk,” "specific risk," "diversifiable risk" or "residual risk," in the
context of an investment portfolio, unsystematic risk can be reduced through diversification.

Key Takeaways

Market risk, or systematic risk, affects the performance of the entire market simultaneously.
Because it affects the whole market, it is difficult to hedge as diversification will not help.
Market risk may involve changes to interest rates, exchange rates, geopolitical events, or
recessions.

4. Credit Risk
Credit risk is the possibility of a loss resulting from a borrower's failure to repay a loan or meet
contractual obligations. Traditionally, it refers to the risk that a lender may not receive the owed
principal and interest, which results in an interruption of cash flows and increased costs for collection.
Excess cash flows may be written to provide additional cover for credit risk.

Traditionally, it refers to the risk that a lender may not receive the owed principal and interest, which
results in an interruption of cash flows and increased costs for collection. When a lender faces
heightened credit risk, it can be mitigated via a higher coupon rate, which provides for greater cash
flows.

Although it's impossible to know exactly who will default on obligations, properly assessing and
managing credit risk can lessen the severity of a loss. Interest payments from the borrower or issuer of a
debt obligation are a lender's or investor's reward for assuming credit risk.

 Credit risk is the possibility of losing a lender takes on due to the possibility of a borrower not
paying back a loan. 

 Consumer credit risk can be measured by the five Cs: credit history, capacity to repay, capital,
the loan's conditions, and associated collateral.

 Consumers posing higher credit risks usually end up paying higher interest rates on loans.
 5. Liquidity Risk

Liquidity is the ability of a firm, company, or even an individual to pay its debts without suffering
catastrophic losses. Conversely, liquidity risk stems from the lack of marketability of an investment that
can't be bought or sold quickly enough to prevent or minimize a loss. It's typically reflected in unusually
wide bid-ask spreads or large price movements.

 Liquidity is the ability of a firm, company, or even an individual to pay its debts without
suffering catastrophic losses.
 Investors, managers, and creditors use liquidity measurement ratios when deciding the level
of risk within an organization.
 If an individual investor, business, or financial institution cannot meet its short-term debt
obligations, it is experiencing liquidity risk

6. Off-Balance-Sheet Risk
Off-Balance-Sheet Risk — the risk posed by factors not appearing on an insurer's or reinsurer's balance
sheet. Excessive (imprudent) growth and legal precedents affecting defense cost coverage are examples
of off-balance-sheet risk.

The risk incurred by the financial institutions due to their activities related to the contingent assets and
liabilities. For financial institutions to some extend engage in the off-balance sheet activates. An off-
balance sheet activities does not appear on the financial intuitions balance sheet rather it is shown as a
note bellow the balance sheet. Now off balance sheet activities can affect future shape of the financial
institution’s balance sheet & thus can significant source of risk exposure.

7. Technology Risk

Technology risk is any potential for technology failures to disrupt your business such as
information security incidents or service outages. ... A security incident results in theft of
customer data resulting in legal liability, reputational damage and compliance issues
Includes all of the above, plus fat-fingered employees accidentally emailing out sensitive
information, software glitches, tripping over power cords, the flood at the data center—or any
other risks to information technology or information that negatively impact business operations.

(Failures to comply with regulations around digital operations, for instance the HIPAA rules for
a hospital or the PCI rules for companies accepting credit cards, might sound like candidates for
technology risk, but managing compliance is only tangentially affecting risk and should probably
be treated as a distinct risk domain within organizations.)

Technology Risk is a subset of…

8. Operational Risk
Operational risk summarizes the uncertainties and hazards a company faces when it attempts to do its
day-to-day business activities within a given field or industry. A type of business risk, it can result from
breakdowns in internal procedures, people and systems—as opposed to problems incurred from
external forces, such as political or economic events, or inherent to the entire market or market
segment, known as systematic risk.

Operational risk can also be classified as a variety of unsystematic risk, which is unique to a specific
company or industry.

 Operational risk summarizes the chances and uncertainties a company faces in the course of
conducting its daily business activities, procedures, and systems.

 Operational risk is heavily dependent on the human factor: mistakes or failures due to actions or
decisions made by a company's employees.

 A type of business risk, operational risk is distinct from systematic risk and financial risk.

9. Country or Sovereign Risk

Sovereign risk is the chance that a national government's treasury or central bank will default on their
sovereign debt, or else implement foreign exchange rules or restrictions that will significantly reduce or
negate the worth of its forex contracts.

Key Takeaways
 Sovereign risk is the potential that a nation's government will default on its sovereign debt by
failing to meet its interest or principal payments.
 Sovereign risk is typically low, but can cause losses of investors of bonds whose issuers are
experiencing economic woes leading to a sovereign debt crisis.
 Strong central banks can lower the perceived and actual riskiness of government debt, lowering
the borrowing costs for those nations in turn.
 Sovereign risk can also directly impact forex traders holding contracts that exchange for that
nation's currency.

10. Insolvency Risk

The risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk.

The risk that an individual or especially a company may be unable to service its debts.
Bankruptcy risk is greater when the individual or firm has little or no cash flow, or when it
manages its assets poorly. Banks assess bankruptcy risk when considering whether to make a
loan. It is also called insolvency risk.