Explain the following terms

a. NON-FINANCIAL RISK

- Non-financial risk are all of the risks which are not covered by traditional financial risk
management. 

 Business Risk

-Anything that threatens a company's ability to achieve its financial goals. It is

also the exposure a company or organization has to factor(s) that will lower its profits or
lead it to fail.

 Operational Risk

-It is the risk of loss resulting from ineffective or failed internal processes,
people, systems, or external events that can disrupt the flow of business operations. The
losses can be directly or indirectly financial.

 Information Technology Risk

-It is basically any threat to your business data, critical systems and business
processes. It is the risk associated with the use, ownership, operation, involvement,
influence and adoption of IT within an organization. 

 Reputation Risk

-It is the threat to the profitability or sustainability of a business or other entity

that is caused by unfavorable public perception of the organization or its products or
services. 

 Tax, Legal, Regulatory Compliance Risk

-Tax, legal, regulatory compliance risk is an organization's potential exposure to

legal penalties, financial forfeiture and material loss, resulting from its failure to act in
accordance with industry laws and regulations, internal policies or prescribed best
practices as well as because of a potential that changes to laws, regulations or
interpretations.

b. FINANCIAL RISK

- Financial risk is the possibility of losing money on an investment or business venture. Furthermore,
it is a type of danger that can result in the loss of capital to interested parties.

i. Market Risk
 -It is the risk arising from changes in the markets to which an organization has
exposure. 

 Currency and currency volatility

-Currency is a medium of exchange for goods and services. In short, it is money,
in the form of paper or coins, usually issued by a government and generally accepted at
its face value as a method of payment. Currency volatility on the other hand, is the
frequency and extent of changes in a currency's value. It is measured by calculating the
dispersion of exchange rate changes around the mean, expressed in terms of daily,
weekly, monthly or annual standard deviations; The larger the number, the greater the
volatility over a period of time.

 Equity and equity volatility

-Equity represents the value that would be returned to a company's

shareholders if all of the assets were liquidated and all of the company's debts were
paid off.  Equity volatility on the other hand, is the significant changes in the demand
and supply of stocks as a result of investor decision-making.

 Interest rate and interest rate volatility

-The interest rate is the amount charged on top of the principal by a lender to a
borrower for the use of assets. It also applies to the amount earned at a bank or
credit union from a deposit account. Interest rate volatility on the other hand, refers
to the variability of interest rates on loans and savings over time.

 Credit spread and credit spread volatility

-The credit spread is the difference in yield between bonds of a similar maturity
but with different credit quality. Meanwhile, credit spread volatility represents only that
part of the total yield volatility which is triggered by default risk or credit risk of a bond.

 Business risk and correlation risk

- Business risk refers to a threat to the company’s ability to achieve its financial

goals. On the other hand, correlation risk is the risk of financial loss due to adverse
movements in the correlation between two or more (financial) variables. It is the risk
that the correlation between two or more variables changes unfavorably. An increase in
asset return correlations increases the risk of financial loss.

 Hybrid securities and derivative securities

-Hybrid Securities are securities that have a combination of debt and equity

characteristics. These securities tend to offer a higher return than pure fixed income
securities such as bonds but a lower return than pure variable income securities such as
equities. Meanwhile, derivative securities are financial contract between two parties for
 buying or selling a property, assets, commodity, or other security at a predetermined
price within a specific time period. Generally, a derivative security is a contract
representing a group of underlying assets

ii. 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.

 Issuer risk-default and recovery

-Issuer risk-default is the risk that a lender takes on in the chance that a
borrower will be unable to make the required payments on their debt obligation.
Meanwhile recovery is the extent to which principal and accrued interest on defaulted
debt can be recovered, expressed as a percentage of face value. It can also be defined as
the value of a security when it emerges from default or bankruptcy.

 Counterparty risk

- Counterparty risk is the probability that the other party in an investment,

credit, or trading transaction may not fulfill its part of the deal and may default on
the contractual obligations.

iii. Liquidity Risk

- Liquidity risk is defined as the risk of incurring losses resulting from the inability to
meet payment obligations in a timely manner when they become due or from being unable to
do so at a sustainable cost.

 Trading bid/ask spread

- A bid-ask spread is the amount by which the ask price exceeds the bid
price for an asset in the market. The bid-ask spread is essentially the difference
between the highest price that a buyer is willing to pay for an asset and the lowest
price that a seller is willing to accept.

iv. Asset-Liability Risk

- It is the risk in the managing the use of assets and cash flows to reduce the firm's risk
of loss from not paying a liability on time

 Cash flow and duration mismatch

- the timing of the cash flows needed to settle liabilities is not equal to the
timing of the cash flows generated by the assets backing these liabilities
  Hedging and diversification

- Hedging is a risk management strategy employed to offset losses in

investments by taking an opposite position in a related asset. Hedging requires one
to pay money for the protection it provides, known as the premium. On the other
hand, diversification is an overall portfolio management strategy that investors use
to smooth out risk among all their assets, while hedging helps to decrease one's
losses by taking an offsetting position in that specific asset.

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