Financial Analysis. Lesson 28. Financial Risk Management and Stress Testing

Financial Analysis. Lesson 28. Financial Risk Management and Stress Testing

1. Financial risk management identifies, assesses, and mitigates potential financial risks.

2. Market risk relates to changes in asset prices due to market volatility.

3. Credit risk evaluates the likelihood of a borrower defaulting on debt.

4. Operational risk arises from internal failures in systems, people, or processes.

5. Liquidity risk involves the difficulty of selling assets without loss.

6. Concentration risk occurs when investments are overly focused in one area.

7. Reputational risk impacts a company’s public image and investor confidence.

8. Compliance risk involves legal consequences from non-adherence to regulations.

9. Economic capital represents the necessary buffer to cover unexpected losses.

10. Value at risk (VaR) calculates potential loss within a given confidence level.

11. Conditional VaR (CVaR) estimates average losses beyond the VaR threshold.

12. Stress testing simulates extreme scenarios to test financial stability.

13. Scenario analysis examines outcomes under different economic conditions.

14. Sensitivity analysis assesses how changes in variables impact financial outcomes.

15. Risk tolerance defines acceptable risk levels based on company policy.

16. Capital adequacy ensures a company has enough capital to absorb losses.

17. Counterparty risk is the risk that the other party defaults.

18. Insurance hedging transfers certain risks to insurance providers.

19. Credit derivatives offer protection against potential credit defaults.

20. Early warning indicators (EWIs) flag potential financial trouble before it escalates.

21. Reverse stress testing identifies scenarios that would break financial models.

22. Contingency planning prepares for unexpected disruptions in financial operations.

23. Systemic risk threatens the stability of the entire financial system.

24. Risk appetite framework outlines acceptable risks aligned with business goals.

25. Risk-weighted assets adjust asset values based on their associated risks.

26. Internal controls mitigate risks through checks and balances within operations.

27. Backtesting assesses model accuracy by comparing predictions to real outcomes.

28. Probability of default (PD) estimates the chance of a borrower defaulting.

29. Loss given default (LGD) calculates potential loss if a borrower defaults.

30. Capital planning aligns resources to meet regulatory and strategic risk needs.

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Technical Examples:

1. Stress testing evaluates if institutions can withstand extreme economic shocks.

2. Conditional VaR assesses potential losses in tail risk scenarios.

3. Early warning indicators help anticipate and prevent significant financial losses.