The risk-neutral probabilities definition is a mathematical model that calculates the probability of an event occurring, without taking into account the inherent risk involved. This means that the probability is calculated as if there was no risk involved in the event occurring. This definition is often used in financial models, where the goal is to … Read more
Unsystematic risk is a type of risk that is inherent to a particular security or company and that can be diversified away by investing in a variety of securities. This type of risk is also known as specific risk or diversifiable risk. Systematic risk, on the other hand, is a type of risk that is … Read more
Financial exposure is the potential for financial loss that a company faces. It can arise from a variety of sources, including currency risk, credit risk, and interest rate risk. Financial exposure can have a significant impact on a company’s bottom line, and so managing it effectively is crucial to the success of the business. There … Read more
A variable prepaid forward contract is a type of contract used to hedge against the risk of a fall in the price of an asset. The contract is an agreement between two parties to buy or sell an asset at a fixed price at a future date. The price is fixed at the time the … Read more
Gharar is a term used in Islamic finance to refer to a type of risk that is considered to be unacceptable. Gharar arises when there is uncertainty about an event or transaction, which can lead to a situation where one party is unable to fulfill their obligations. This type of risk is often associated with … Read more
Decision analysis (DA) is a systematic process for identifying, analyzing, and evaluating the possible outcomes of decisions in order to choose the best possible course of action. It is a tool that can be used to tackle any problem that involves making a decision, whether it is a simple decision such as what to have … Read more
Margin Call: What It Is and How to Meet One A margin call is a demand from your broker for additional funds to cover losses in your margin account. If you don’t meet the margin call, your broker can sell securities in your account to cover the losses. Here are two examples of how a … Read more
Risk is the potential for an adverse event or set of events to occur that will have an impact on the achievement of objectives. Standalone risk is the risk of loss that is not associated with any other risks. It is the purest form of risk and is often used to measure the risk of … Read more
Risk arbitrage is an investment strategy that seeks to profit from the difference in price between two securities that are identical except for their level of risk. The strategy involves buying the less risky security and selling the more risky security. The goal of risk arbitrage is to make a profit from the price differential … Read more
According to the risk parity definition, a portfolio is constructed such that each asset contributes an equal amount of risk. This approach is different from traditional portfolio construction, which focuses on balancing the mix of asset classes. The risk parity definition has its roots in modern portfolio theory, which posits that the risk of a … Read more
