Risks and Its Types
Types of Risk
Stand-Alone Risk
This risk assumes the project a company intends to pursue is a single asset that is separate from the company's other assets. It is measured by the variability of the single project alone. Stand-alone risk does not take into account how the risk of a single asset will affect the overall corporate risk.
Corporate Risk
This risk assumes the project a company intends to pursue is not a single asset but incorporated with a company's other assets. As such, the risk of a project could be diversified away by the company's other assets. It is measured by the potential impact a project may have on the company's earnings.
Market Risk
This looks at the risk of a project through the eyes of the stockholder. It looks at the project not only from a company's perspective, but from the stockholder's overall portfolio. It is measured by the effect the project may have on the company's beta. This deals with un favorable price or volatility that affects the assets contained in a firm’s or fund’s portfolio. It can be defined as the doubt of a financial institution’s earnings which results from changes in market conditions such as the price of an asset, interest rates, market volatility and market liquidity.
Liquidity Risk The possibility that the cash available to a bank exceed by customer’s calls on it, or the income generated by a corporation, along with the funds raise through equity or debt issuance and/or borrowing, are insufficient to cover operating commitment forcing the corporation to stop operations. It can also be through thin markets sometimes resulting from distractions, which result in the unavailability of hedging instruments at economic prices.
Most institutions generally face two types of liquidity risk, the first relates to the depth of markets for definite products and the second to funding the financial-trading activities of the firm. For example, some firms have contract limits for every futures contract based on
Stand-Alone Risk
This risk assumes the project a company intends to pursue is a single asset that is separate from the company's other assets. It is measured by the variability of the single project alone. Stand-alone risk does not take into account how the risk of a single asset will affect the overall corporate risk.
Corporate Risk
This risk assumes the project a company intends to pursue is not a single asset but incorporated with a company's other assets. As such, the risk of a project could be diversified away by the company's other assets. It is measured by the potential impact a project may have on the company's earnings.
Market Risk
This looks at the risk of a project through the eyes of the stockholder. It looks at the project not only from a company's perspective, but from the stockholder's overall portfolio. It is measured by the effect the project may have on the company's beta. This deals with un favorable price or volatility that affects the assets contained in a firm’s or fund’s portfolio. It can be defined as the doubt of a financial institution’s earnings which results from changes in market conditions such as the price of an asset, interest rates, market volatility and market liquidity.
Liquidity Risk The possibility that the cash available to a bank exceed by customer’s calls on it, or the income generated by a corporation, along with the funds raise through equity or debt issuance and/or borrowing, are insufficient to cover operating commitment forcing the corporation to stop operations. It can also be through thin markets sometimes resulting from distractions, which result in the unavailability of hedging instruments at economic prices.
Most institutions generally face two types of liquidity risk, the first relates to the depth of markets for definite products and the second to funding the financial-trading activities of the firm. For example, some firms have contract limits for every futures contract based on