Korea Financial Risk Manager key terms

The amount and type of risk an institution is willing to accept while pursuing its objectives, usually expressed as qualitative statements plus quantitative limits approved by the board.

The maximum deviation from a target or budget that an institution can absorb without threatening its solvency or strategic goals, often quantified per risk type and business line.

A binding quantitative constraint assigned to a desk, portfolio, or risk factor that caps exposure, such as a notional ceiling, a stop-loss trigger, or a VaR cap.

An integrated framework that identifies, measures, aggregates, and reports all material risks across an organization so that risk-taking is aligned with strategy and capital.

The amount of capital a firm calculates it needs to absorb unexpected losses at a chosen confidence level and horizon, independent of regulatory minimums.

The minimum capital a supervisor requires a firm to hold against credit, market, and operational risk, computed under prescribed rules such as the Basel framework.

A conflict of interest arising when managers or traders act in their own interest rather than the owners' interest, motivating governance controls, compensation design, and independent risk oversight.

The shared norms, incentives, and behaviors that determine how employees identify and escalate risk, including willingness to challenge senior staff and report losses promptly.

The allocation of authority and accountability for risk decisions among the board, risk committee, chief risk officer, and business units, including escalation and independence arrangements.

A control structure in which business units own risk, an independent risk and compliance function monitors it, and internal audit provides assurance to the board.

A loss threshold that should not be exceeded with a stated probability over a stated horizon, for example a one-day 99% VaR of KRW 2 billion.

The average loss in the worst tail of outcomes beyond the VaR threshold, making it sensitive to the size of extreme losses rather than only their frequency.

A property of return distributions in which extreme outcomes occur more often than a normal distribution predicts, understating risk when normality is assumed.

A moment measuring how much probability mass sits in the tails of a distribution; excess kurtosis above zero signals fatter tails than the normal distribution.

A moment measuring asymmetry of a distribution; negative skew means the left tail is longer, so large losses are more likely than a symmetric distribution suggests.

A VaR method that reprices the current portfolio under a series of past market moves, so results depend entirely on the historical window chosen.

A method that draws many random scenarios from assumed distributions of risk factors, reprices the portfolio in each, and builds a loss distribution from the results.

Systematically comparing predicted risk measures with realized profit and loss to count exceptions, thereby testing whether a model's calibration is acceptable.

A statistical test of VaR accuracy that compares the observed number of exceptions with the number expected under the model, using a likelihood ratio statistic.

The empirical tendency for large price changes to be followed by large changes and small by small, motivating models such as GARCH that let variance evolve over time.

A time-series model in which today's variance depends on recent squared shocks and on recent variance, capturing volatility clustering and mean reversion in volatility.

An exponentially weighted moving average of squared returns in which older observations decay geometrically, giving a simple, responsive estimate of current volatility.

The tendency of correlations between assets to rise toward one during market stress, undermining diversification benefits that were estimated in calmer periods.

A private, non-standardized agreement to buy or sell an asset at a fixed price on a future date, carrying counterparty risk and usually settled at maturity.

An exchange-traded, standardized agreement to trade an asset at a future date, marked to market daily through a clearinghouse that manages default risk.

Collateral posted when a derivative position is opened, sized to cover potential losses over the close-out period if the counterparty defaults.

Collateral transferred daily or intraday to reflect changes in the mark-to-market value of a position, settling accumulated gains and losses between counterparties.

An agreement to exchange fixed and floating interest payments on a notional principal over a set period, used to hedge or take exposure to interest rate movements.

The risk that the price relationship between a hedging instrument and the exposure being hedged changes unfavorably, leaving residual loss despite the hedge.

A contract in which one party pays periodic premiums and receives compensation if a specified reference entity experiences a defined credit event.

The risk that the other side of a derivative or securities financing transaction defaults before final settlement, with exposure equal to the cost of replacing the trade.

A situation in which exposure to a counterparty increases precisely when that counterparty's probability of default also rises, making losses larger than standard models imply.

The market value of counterparty default risk on a derivative position, subtracted from the risk-free value and driven by exposure, default probability, and recovery.

The likelihood that an obligor fails to meet contractual payments within a given horizon, typically estimated from ratings, market spreads, or statistical models.

The share of an exposure expected to be lost if default occurs, equal to one minus the recovery rate, reflecting collateral and seniority.

The estimated outstanding amount owed at the moment a borrower defaults, including drawn balances and a share of undrawn commitments.

A structural credit model treating firm equity as a call option on firm assets, so default occurs when asset value falls below the debt threshold at maturity.

The number of standard deviations by which expected asset value exceeds the default threshold, a structural measure that falls as leverage or asset volatility rises.

The yield premium a bond or loan pays over a comparable risk-free rate, compensating investors for expected default losses, liquidity, and risk aversion.

Evaluating portfolio or firm losses under severe but plausible scenarios, such as sharp rate moves or a credit downturn, to complement statistical risk measures.

Assessing the impact of specified hypothetical events, often historical or expert-designed, on positions and capital, including events too rare for statistical estimation.

The post-2008 international capital and liquidity framework raising capital quality and buffers, adding a leverage ratio and liquidity standards for banks.

A Basel standard requiring a bank to hold enough high-quality liquid assets to survive a 30-day stressed outflow scenario.

The risk that a firm cannot meet cash or collateral obligations as they fall due without incurring unacceptable costs, distinct from the ease of selling assets.

The risk that a position cannot be liquidated quickly at a price close to fair value, widening effective spreads and raising exit costs in stress.

Combining exposures whose returns are imperfectly correlated so that portfolio risk is less than the weighted average of individual risks.

The variance of a weighted combination of assets, equal to the sum of weighted variances plus pairwise covariance terms, showing how correlation drives total risk.

The sensitivity of an asset's return to movements in the market portfolio, computed as covariance with the market divided by market variance.

A model stating expected return equals the risk-free rate plus beta times the market risk premium, pricing only non-diversifiable risk.

A measure of a bond's price sensitivity to small yield changes, approximately the percentage price change for a one-unit shift in yield.

The second-order curvature of a bond's price-yield relationship, correcting duration estimates and making price gains from yield falls exceed losses from equal rises.

A closed-form option pricing model assuming lognormal asset prices, constant volatility, and no arbitrage, producing a price from spot, strike, rate, volatility, and maturity.

The volatility input that makes an option pricing model reproduce the observed market price, serving as a quoted measure of expected future price variability.

The pattern in which implied volatility varies with strike, often higher for out-of-the-money options, contradicting the constant-volatility assumption of basic models.

Offsetting a position's sensitivity to the underlying price by trading the underlying so that small price moves produce offsetting gains and losses.

The rate at which an option's delta changes as the underlying price moves, measuring how quickly a delta hedge becomes ineffective.

A plot of yields against maturity for bonds of similar credit quality, whose level, slope, and shape inform pricing and interest rate risk decisions.