Associate PRM flashcards

33 cards. Read the term and the definition here. The deck at the top of this page is optional.

Pure vs speculative risk

Pure risk offers only loss or no loss, such as fire or liability. Speculative risk offers gain or loss, such as trading or a new venture.

Risk appetite vs tolerance

Risk appetite is the amount and type of risk an organization is willing to accept in pursuit of objectives. Risk tolerance is the acceptable variation around that appetite.

Three lines model

Business units own and manage risk in the first line. An independent risk function provides oversight and frameworks in the second. Internal audit gives independent assurance in the third.

Expected loss formula

Expected loss equals probability of default multiplied by exposure at default multiplied by loss given default. It represents the average long-run cost of credit losses.

Unexpected loss

Unexpected loss is the volatility of losses around the expected value. It is the primary driver of economic capital held against credit portfolios.

Value at Risk

VaR is the loss not exceeded with a stated probability over a stated horizon. It gives no information about the size of losses beyond that threshold.

Expected shortfall

Expected shortfall is the average loss conditional on losses exceeding VaR. Unlike VaR it is sub-additive and captures tail severity.

Stress testing

Stress testing applies severe but plausible scenarios to portfolios to estimate losses under adverse conditions that historical data may not capture.

Key risk indicator

A key risk indicator is a forward-looking metric tracked against thresholds. Breaching a threshold signals rising risk and triggers escalation before losses occur.

Risk map

A risk map plots identified risks on a grid of likelihood against impact. It prioritizes which risks need treatment and capital allocation.

Merton model

The Merton model treats firm equity as a call option on firm assets with debt as the strike. Default occurs when asset value falls below debt at maturity.

Credit migration risk

Credit migration risk is the risk that a borrower's rating deteriorates without default. The downgrade reduces the market value of the exposure.

Concentration risk

Concentration risk arises from large single-name exposures or correlated exposures across sectors and regions. Limits on exposure size cap this risk.

Wrong-way risk

Wrong-way risk occurs when exposure to a counterparty increases as the counterparty's credit quality deteriorates, amplifying potential losses.

Modified duration

Modified duration equals Macaulay duration divided by one plus yield divided by compounding frequency. It approximates percentage price change for a small yield shift.

Convexity adjustment

Convexity corrects duration estimates for larger yield moves. Price change approximates negative duration times yield change plus half convexity times yield change squared.

Delta and gamma

Delta is the change in option value per unit change in the underlying. Gamma is the change in delta per unit change in the underlying.

Vega and theta

Vega measures sensitivity of option value to changes in implied volatility. Theta measures the change in option value from the passage of time.

Parametric VaR formula

Parametric VaR equals the z-score for the confidence level multiplied by portfolio volatility and portfolio value, assuming normally distributed returns.

VaR backtesting

Backtesting compares the number of actual losses exceeding VaR to the expected count. Excess exceptions indicate the model understates risk.

Operational risk definition

Operational risk is loss from inadequate or failed internal processes, people, systems, or external events. Basel excludes strategic and reputational risk from this definition.

Basel event categories

Basel groups operational losses into internal fraud, external fraud, employment practices, clients and business practices, physical asset damage, system failures, and execution failures.

Loss distribution approach

The loss distribution approach convolves a frequency distribution, typically Poisson, with a severity distribution to derive the aggregate loss distribution and operational VaR.

Recovery time objective

The recovery time objective is the maximum acceptable outage duration for a process. The recovery point objective is the maximum acceptable data loss measured in time.

Four Ts of risk treatment

Hazard risks can be tolerated, treated through controls, transferred to insurers or counterparties, or terminated by ceasing the activity.

Residual risk

Residual risk is the risk remaining after controls and mitigation are applied. It is compared against risk appetite to decide further action.

Basis risk

Basis risk is the risk that a hedge's value does not move perfectly with the hedged exposure because the underlying instruments differ.

Limit utilization reporting

Limit utilization reporting compares current exposures against approved limits at desk, portfolio, and firm level. Breaches trigger defined escalation.

Maker-checker control

Maker-checker is a control where one person prepares a transaction or entry and a second independent person reviews and approves it before release.

Conflicts of interest

Conflicts of interest arise when personal or commercial interests could compromise professional judgment. They must be disclosed and managed, not ignored.

Whistleblowing

Whistleblowing is the escalation of unethical or unsafe practices to appropriate authorities. Protections prevent retaliation against those who report in good faith.

Model risk disclosure

Model risk is the risk that a model produces inaccurate outputs. Professionals must disclose model limitations and not present estimates as certainty.

Client suitability

Suitability requires that products and advice match a client's objectives, risk tolerance, financial situation, and constraints before recommendation.