Financial Risk

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Financial Risk

Summary of Financial Risk

The risk borne by an exporter that his foreign customer may be unable or unwilling to pay for the merchandise purchased; the financial risk relates purely to commercial considerations and not to such “political”risks as expropriation or inconvertibility of currency. (Main Author: William J. Miller)

Collateralization Risks

From the International Swaps and Derivatives Association (ISDA):

There are a number of risks associated with the establishment and maintenance of collateral
programs. Credit risk is the most obvious – see ‘credit risk mitigation’. Some of the key risks
also referred to in the current survey are described below:

  • Correlation Risk: In the context of the current survey, the risk that the value of collateral will
    change substantially and directionally in line with that of the exposure it is intended to secure, thereby reducing its effectiveness as a form of credit risk mitigation (see this concept).
  • Custodian Risk: A custodian is a third party appointed to safe-keep assets on behalf of
    account-holders, whose rights to those assets will be shown by entries in a register or similar set of records (typically in computerized form). Custodian risk is the risk of failed or
    inadequate performance by the custodian.
  • Issuer Risk: The credit risk associated with securities posted as collateral.
  • Legal Risk: A sub-category of operational risk [qv], this is the risk that a collateral
    arrangement will not be enforceable, for instance because of failure to implement a properly documented contract.
  • Liquidity Risk: As distinct from liquidation risk, the risk that the value a party is able to
    realize on collateral held is diminished because of prevailing bid-offer spreads, particularly in relation to the amount of collateral to be realized.
  • Liquidation Risk: As distinct from liquidity risk, the risk that a party will not be able to
    realize the value of collateral held in a timely fashion.
  • Operational Risk: Any of a series of risks (including ‘legal risk’, see deir definition) which can reduce the effectiveness of a collateral arrangement. The definition of operational risk that ISDA uses is: ‘The risk of direct or indirect loss resulting from inadequate or failed internal process, people and systems or from external events’. (1)

Resources

Notes

  1. Taken from ‘Operational Risk – The Next Frontier’, January 2000, published by ISDA jointly with the British Bankers’ Association and Robert Morris Associates. Available from the International Swaps and Derivatives Association.

See Also

  • Commercial Risk
  • Financial Paper
  • Collateral
  • Risk Management
  • Financial Accounting Standards Board
  • Political Risk
  • Transfer Risk
  • Currency Risk
  • Interest Rate Risk
  • Financial Solidarity

Hierarchical Display of Financial risk

Finance > Free movement of capital > Financial market

Financial risk

Concept of Financial risk

See the dictionary definition of Financial risk.

Characteristics of Financial risk

Resources

Translation of Financial risk

Thesaurus of Financial risk

Finance > Free movement of capital > Financial market > Financial risk

See also

  • Credit risk
  • Market risk
  • Liquidity risk
  • Default risk
  • Foreign exchange rate risk
  • Systematic risk
  • Sovereign risk
  • Interest rate risk
  • Macroprudential risk
  • Systemic risk
  • Exchange risk
  • Loan risk

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