Introduction to Risk

Any transaction or undertaking with an element of uncertainty as to its future outcome carries an element of risk; risk can be thought of as uncertainty. Banks and other financial institutions are exposed to a number of risks during the course of normal operations. The different types of risk are broadly characterised as Market risk, Credit risk, Liquidity risk and Operational risk. Risk exists in all competitive business although the balance between financial risks and general and management risk varies with the type of business engaged in. The key objective of the risk management function within a financial institution is to allow for a clear understanding of the risks and exposures the firm is engaged in, such that monetary loss is deemed acceptable by the firm. One of the primary tools of the risk manager is value-at-risk (VaR), which is a quantitative measure of the risk exposure of an institution.