| Risk | The possibility that actual outcomes differ from expected outcomes. Encompasses both downside losses and upside surprises. |
| Risk exposure | The degree to which an entity is affected by a particular risk factor. Measured by sensitivity to the factor. |
| Risk management | The process of identifying, measuring, monitoring, and modifying risk exposures to align with an organization’s risk tolerance and objectives. |
| Risk governance | The top-level policies, procedures, and organizational structures that define how risk management is conducted, overseen, and reported. Ultimately the responsibility of the board of directors. |
| Risk management framework | A comprehensive system with seven elements: governance, identification, measurement, management, monitoring, communication, and strategic integration. |
| Chief Risk Officer (CRO) | The senior executive responsible for leading the risk management function, reporting to the board/CEO, and ensuring enterprise-wide risk oversight. |
| Risk tolerance | The maximum level of risk an organization is willing and able to accept in pursuit of its objectives. Determines risk limits and budgets. |
| Risk budgeting | The process of allocating the total risk tolerance across asset classes, strategies, or risk factors. Each allocation’s marginal contribution to risk should be proportional to its marginal contribution to return. |
| Value at Risk (VaR) | The maximum expected loss at a given confidence level over a specified time horizon. Example: “95% 1-day VaR of $1M” means a 5% chance of losing more than $1M in one day. |
| Financial risk | Risks arising from financial market exposures — includes market risk, credit risk, and liquidity risk. |
| Credit risk | The risk that a counterparty or borrower will fail to meet its obligations (default), or that its credit quality will deteriorate. |
| Liquidity risk | The risk of being unable to buy or sell an asset quickly at a fair price, or the risk of being unable to meet short-term obligations. |
| Market risk | The risk of losses due to adverse changes in market prices (equity, interest rate, currency, commodity). |
| Non-financial risk | Risks not directly related to financial markets — includes operational, model, legal, regulatory, political, settlement, and reputational risk. |
| Operational risk | Risk of loss from inadequate or failed internal processes, people, systems, or external events (fraud, IT failure, natural disaster). |
| Model risk | Risk of loss resulting from flawed models used for valuation, risk measurement, or decision-making. |
| Tail risk | Risk of extreme losses that fall in the tails of the return distribution, beyond what normal distribution assumptions predict. |
| Settlement risk | Risk that one party delivers its obligation but the counterparty fails to deliver (also called Herstatt risk in FX markets). |
| Chained (cascading) risk interaction | When one risk event triggers a sequence of additional risk events (e.g., market crash → liquidity crisis → credit defaults). |
| Adverse risk interaction | The phenomenon where correlations increase during stress periods, reducing the effectiveness of diversification when it is most needed. |
| Risk modification | Actions taken to change risk exposure: avoidance (eliminate), acceptance (retain), transfer (insurance/hedging), or mitigation/reduction (diversification, limits). |