Risk glossary

 

Risk management

Control and limitation of the risks faced by an organisation due to its exposure to changes in financial market variables, such as foreign exchange and interest rates, equity and commodity prices or counterparty creditworthiness. It may be necessary because of the financial impact of an adverse move in the market variable (market risk); because the organisation is ill-prepared to respond to such a move (operational risk); because a counterparty defaults (credit risk); or because a specific contract is not enforceable (legal risk).

Market risks are usually managed by hedging with financial instruments, although a firm may also reduce risk by adjusting its business practices (see natural hedge). While financial derivatives lend themselves to this purpose, risk can also be reduced through judicious use of the underlying assets – for example, by diversifying portfolios.

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