6.1 Change, uncertainty, risk and loss Flashcards
Exogenous shocks definition
Events that can happen without warning
Volatility definition
The extent to which there are large swings between high and lows
Risk definition
The possibility that something might change
What can risk be measured in term of?
Probability
What is pure risk?
A situation in which the possible change has only a negative potential outcome
What is speculative risk?
When a risk can have either a good or a bad outcome
How can risk for flood damage be assessed?
By considering the geographical position of the property and by looking at weather forecasts
Can risk be eliminated?
No
What is the impact of risk measured in terms of?
Amount of financial loss suffered
The amount of loss suffered by a provider depends on what?
How much exposure they have - the amount of loss depends on how much money it has lent to customers
Categories loss can be subdivided into:
- Expected loss
- Unexpected loss
- Catastrophic loss
Unexpected loss definition
The amount by which the actual loss might exceed the expected loss
What can unexpected loss be a result of?
- Unexpected shock
- Unrealistic predictions
Catastrophic loss definition
Loss in excess of unexpected loss that is unlikely, but if it does happen the consequences will be devastating
Examples of risk and uncertainty in the financial services sector:
- Inflation rates
- Stock market volatility
- Attitudes to credit and debt
