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Concentration Risk
Concentration risk
Concentration risk
is a banking term denoting the overall spread of a bank's outstanding accounts over the number or variety of debtors to whom the bank has lent money. This risk is calculated using a "concentration ratio" which explains what percentage of the outstanding accounts each bank loan represents. For example, if a bank has 5 outstanding loans of equal value each loan would have a concentration ratio of .2; if it had 3, it would be .333. Various other factors enter into this equation in real world applications, where loans are not evenly distributed or are heavily concentrated in certain economic sectors. A bank with 10 loans, valued at 10 dollars a piece would have a concentration ratio of .10; but if 9 of the loans were for 1 dollar, and the last was for 50, the concentration risk would be considerably higher
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Expected Return
The expected return (or expected gain) on a financial investment is the expected value of its return (of the profit on the investment). It is a measure of the center of the distribution of the random variable that is the return.[1] It is calculated by using the following formula: E [ R ] = ∑ i = 1 n R i P i displaystyle E[R]=sum _ i=1 ^ n R_ i P_ i where R i displaystyle R_ i is the return in scenario i displaystyle i ; P i displaystyle P_ i is the probability for the return R i displaystyle R_ i in scenario i displaystyle i ; and n displaystyle n is the number of scenarios.Although this is what one expects the return to be, it only refers to the long-term average
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Bank
A bank is a financial institution that accepts deposits from the public and creates credit.[1] Lending
Lending
activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial stability of a country, banks are highly regulated in most countries. Most nations have institutionalized a system known as fractional reserve banking under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords. Banking
Banking
in its modern sense evolved in the 14th century in the prosperous cities of Renaissance Italy
Renaissance Italy
but in many ways was a continuation of ideas and concepts of credit and lending that had their roots in the ancient world
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Economic Downturn
In economics, a recession is a business cycle contraction which results in a general slowdown in economic activity.[1][2] Macroeconomic indicators such as GDP
GDP
(gross domestic product), investment spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise. In the United Kingdom, it is defined as a negative economic growth for two consecutive quarters.[3][4] Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock or the bursting of an economic bubble
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Economic Sector
One classical breakdown of economic activity distinguishes three sectors:[1]Primary: involves the retrieval and production of raw materials, such as corn, coal, wood and iron. (A coal miner, farmer or fisherman would be workers in the primary sector.) Secondary: involves the transformation of raw or intermediate materials into goods e.g. manufacturing steel into cars, or textiles into clothing. (A builder and a dressmaker would be workers in the secondary sector.) Tertiary: involves the supplying of services to consumers and businesses, such as baby-sitting, cinema and banking. (A shopkeeper and an accountant would be workers in the tertiary sector.)In the 20th century, economists began to suggest that traditional tertiary services could be further distinguished from "quaternary" and quinary service sectors
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Bank Loan
In finance, a loan is the lending of money from one individual, organization or entity to another individual, organization or entity. A loan is a debt provided by an organization or individual to another entity at an interest rate, and evidenced by a promissory note which specifies, among other things, the principal amount of money borrowed, the interest rate the lender is charging, and date of repayment. A loan entails the reallocation of the subject asset(s) for a period of time, between the lender and the borrower. In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the lender to engage in the loan
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Debtor
A debtor is an entity that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of this debt arrangement is a bank, the debtor is more often referred to as a borrower. If X borrowed money from his/her bank, X is the debtor and the bank is the creditor. If X puts money in the bank, X is the creditor and the bank is the debtor. It is not a crime to fail to pay a debt. Except in certain bankruptcy situations, debtors can choose to pay debts in any priority they choose. But if one fails to pay a debt, they have broken a contract or agreement between them and a creditor. Generally, most oral and written agreements for the repayment of consumer debt - debts for personal, family or household purposes secured primarily by a person's residence - are enforceable. [1] For the most part, debts that are business related must be made in writing to be enforceable by law
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Default (finance)
In finance, default is failure to meet the legal obligations (or conditions) of a loan,[1] for example when a home buyer fails to make a mortgage payment, or when a corporation or government fails to pay a bond which has reached maturity. A national or sovereign default is the failure or refusal of a government to repay its national debt
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Currency Risk
A currency (from Middle English: curraunt, "in circulation", from Latin: currens, -entis), in the most specific use of the word, refers to money in any form when in actual use or circulation as a medium of exchange, especially circulating banknotes and coins.[1][2] A more general definition is that a currency is a system of money (monetary units) in common use, especially in a nation.[3] Under this definition, US dollars, British pounds, Australian dollars, and European euros are examples of currency. These various currencies are recognized stores of value and are traded between nations in foreign exchange markets, which determine the relative values of the different currencies.[4] Currencies in this sense are defined by governments, and each type has limited boundaries of acceptance. Other definitions of the term "currency" are discussed in their respective synonymous articles banknote, coin, and money
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Securitization
Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling their related cash flows to third party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs). Investors are repaid from the principal and interest cash flows collected from the underlying debt and redistributed through the capital structure of the new financing
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Market Portfolio
Market portfolio is a portfolio consisting of a weighted sum of every asset in the market, with weights in the proportions that they exist in the market, with the necessary assumption that these assets are infinitely divisible.[1][2] Richard Roll's critique (1977)[3] states that this is only a theoretical concept, as to create a market portfolio for investment purposes in practice would necessarily include every single possible available asset, including real estate, precious metals, stamp collections, jewelry, and anything with any worth, as the theoretical market being referred to would be the world market. There is some question of whether what is used for the market portfolio really matters.[4] Some authors say that it does not make a big difference; you can use any old index and get similar results. Roll gave an example where different indexes produce much different results, and that by choosing the index you can get any ranking you want
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Shape Risk
Shape risk
Shape risk
in finance is a type of basis risk when hedging a load profile with standard hedging products having a lower granularity. In other words a commodity supplier wants to pre-purchase supplies for expected demand, but can only buy in fixed amounts that are bigger than the demand forecasted. This means it has to either over order or under order and make up the difference at the time of delivery at the spot price which might be much higher. Shape risk
Shape risk
is also related to commodity risk. For example an electricity provider has to produce or buy electricity in advance in order to distribute to its consumers based on forecasts i.e. how much energy will be consumed every minute on the following day. Such forecasts are usually based on the average historical consumption of the same set of customers; however, the provider can only produce e.g. only hourly blocks of electricity of 1MWh, and not smaller quantities
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Basis Risk
Basis risk in finance is the risk associated with imperfect hedging.[1] It arises because of the difference between the price of the asset to be hedged and the price of the asset serving as the hedge, or because of a mismatch between the expiration date of the hedge asset and the actual selling date of the asset (calendar basis risk), or—as in energy—due to the difference in the location of the asset to be hedged and the asset serving as the hedge (locational basis risk).Contents1 Definition 2 Examples 3 See also 4 References4.1 Notes 4.2 External linksDefinition[edit] Under these conditions, the spot price of the asset, and the futures price, do not converge on the expiration date of the future. The amount by which the two quantities differ measures the value of the basis risk
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Volume Risk
Volume risk is a commodity risk which refers to the fact that a player in the commodity market has uncertain quantities of consumption or sourcing, i.e. production of the respective commodity.[1] Examples of other circumstances which can cause large deviations from a volume forecast are weather (e.g. temperature-changes for gas consumption), the plant-availability, the collective customer outrage, but also regulatory interventions. Example[edit] A electricity retailer cannot accurately predict the demand of all house holds for a given time which is why the producer cannot forecast the precise time that a power plant will provide more electricity that consumed, even if the plant always delivers the same output of energy. References[edit]^ Kandl, Peter; Studer, Gerold (January 2001). "Factoring in volume risk". Risk
Risk
magazine: 84f
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Margining Risk
Margining risk is a financial risk that future cash flows are smaller than expected due to the payment of margins, i.e. a collateral as deposit from a counterparty to cover some (or all) of its credit risk.[1] It can be seen as a short-term liquidity risk, a quantity called MaR can be used to measure it. Methodology[edit] In order to decrease the risk of a counter party to default, a technique called portfolio margining is applied, which simply means that the assets within a portfolio are clustered and sorted by the descending projected net loss, e.g. calculated by a pricing model.[2] One can then determine for which cluster(s) one wants to perform margin calls. References[edit]^ Reucroft, Miles. "Portfolio Margining Risk
Risk
vs. Reward". TABB Forum. Retrieved 14 December 2015.  ^ "Portfolio Margining Risk
Risk
Disclosure Statement" (PDF). optionsexpress.com. Charles Schwab
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Credit Derivative
In finance, a credit derivative refers to any one of "various instruments and techniques designed to separate and then transfer the credit risk"[1] or the risk of an event of default of a corporate or sovereign borrower, transferring it to an entity other than the lender[2][3] or debtholder. An unfunded credit derivative is one where credit protection is bought and sold between bilateral counterparties without the protection seller having to put up money upfront or at any given time during the life of the deal unless an event of default occurs. Usually these contracts are traded pursuant to an International Swaps and Derivatives Association (ISDA) master agreement. Most credit derivatives of this sort are credit default swaps
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