Module 3 - Risk Taxonomy

Question 1

What are the main types of risk

Answer 1

Market Risk
Liquidity Risk (markets and funding supply, markets closing deals)
Credit Risk
Operational Risk (People, processes, systems and external)
Insurance/Business Risk (assumption deviation - mortality/morbidity, expenses e.t.c)
Strategic Risk
Compliance Risk

Question 2

What is risk taxonomy

Answer 2

Full list and description of risks that an organisation might face

Question 3

Three main elements of market risk

Answer 3

Investment Risk (interest rates vs fixed income security, asset liability mismatch, pension schemes)
Stock Price Risk (Acquisition and Capital raising)
Uncertainty of input and output prices (suppliers e.t.c)

Question 4

Legal risks are threefold?

Answer 4

New legislation or Change in legislation
Provisions in certain contracts
Court judgments against an organisation

Question 5

What is the difference between systematic and non-systematic risk

Answer 5

Systematic risk cannot be diversified away - it affects the whole in
Non-systematic risk can be diversified away because it is independent to other forms of risk
Non systematic risk can become systematic under stressed conditions

Question 6

What does contagion mean?

Answer 6

Financial losses in one company lead to the/sector leads to losses in another

Question 7

Other types of risk (15)

Answer 7

Moral, Reputation, Basis, Economic, Stock Price, Political, Social Risk, Compliance (Regulatory), Interest Rate, Foreign Exchange, Counter Party, Environmental, Legal, Agency, Project, Strategic, Demographic, Moral Hazard

Question 8

What are the main 4 main causes of Contagion

Answer 8

Financial infrastructure (VISA card)
Funding Liqudity risk (credit crunch)
Common market positions (all traders buying/selling)
Exposure to a common counterparty

Question 9

Types of Legal risk

Answer 9

New legislation risk
Risks inherent in contract provisions
Risks from legal rulings against the company