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

Value at Risk-IntroductionAs Walter Wriston, former chairman of Citigroup, said All of keep is the management of danger, not its elimination and nowadays modern banking is about imperative assay and returns. The ability of a pecuniary institution to control danger is a key factor that determines its success or its failure in food marts. As the late financial crisis has demonstrated institutions that were not properly fain to face the crisis, failed and they were either bailed out by governments or serve economists as bad example. This is the reason risk management is an important field of every(prenominal) financial institution.-Risk and types of Financial RiskAs Philippe Jorion (2007) mentions a definition for risk can be the volatility of unanticipated outcomes and can be created by natural disasters, such as the recent earthquake in lacquer that is reported to cause a drop of 3% of the oil harm in the first few days after it, or it can created by human activities such as technological innovation which capacity create unemployment. Phillip Best (1998) argues that risk matters only when it causes financial losses and financial risk is the one united with financial assets and portfolios and is classified in broader categories market risk, credit risk, liquidity 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. Credit risk is generated when parties involved in an economical contract are either incapable or reluctant to take their commitments. Jorion (2007) classifies liquidity risk into two forms asset liquidity risk and championship liquidity risk. Jorion (2007, p. 23)Asset liquidity riskarises when a transaction can... ... effect than those expected. Nevertheless VaR is always a statistical tool, meaning that if exploitation VaR is estimated a loss of 10 millions in one month, it is cognize that there might be months with smaller losses and months with larger than 10 millions. There is also the problem of identifying the right system 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 judge and prices that can affect the portfolio and the necessity of this derives from the fact that without these factors is impossible to build a proper quantitative measure 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.