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Financial Terms | |
Basis risk |
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Definition of Basis riskBasis riskThe uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for
Related Terms:accrual-basis accountingWell, frankly, accrual is not a good descriptive Agency basisA means of compensating the broker of a program trade solely on the basis of commission Asset-specific RiskThe amount of total risk that can be eliminated by diversification by Bank discount basisA convention used for quoting bids and offers for treasury bills in terms of annualized Bankruptcy riskThe risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk. BasisRegarding a futures contract, the difference between the cash price and the futures price observed in the Basis pointIn the bond market, the smallest measure used for quoting yields is a basis point. Each percentage ![]() Basis PointOne one-hundredth of one percent Basis pointOne hundredth of one percentage point, or 0.0001. Basis PointOne one-hundredth of a percentage point, used to express variations in yields. For example, the difference between 5.36 percent and 5.38 percent is 2 basis points. Basis pricePrice expressed in terms of yield to maturity or annual rate of return. Beta riskrisk of a firm measured from the standpoint of an investor who holds a highly diversified portfolio. Bond-equivalent basisThe method used for computing the bond-equivalent yield. Business riskThe risk that the cash flow of an issuer will be impaired because of adverse economic Call riskThe combination of cash flow uncertainty and reinvestment risk introduced by a call provision. Commercial riskThe risk that a foreign debtor will be unable to pay its debts because of business events, ![]() Company-specific riskRelated: Unsystematic risk Companyspecific RiskSee asset-specific risk Completion riskThe risk that a project will not be brought into operation successfully. Cost basisAn asset’s purchase price, plus costs associated with the purchase, like installation fees, taxes, etc. Counterparty riskThe risk that the other party to an agreement will default. In an options contract, the risk Country financial riskThe ability of the national economy to generate enough foreign exchange to meet Country risk GeneralLevel of political and economic uncertainty in a country affecting the value of loans or Credit riskThe risk that an issuer of debt securities or a borrower may default on his obligations, or that the Credit RiskFinancial and moral risk that an obligation will not be paid and a loss will result. Cross-border riskRefers to the volatility of returns on international investments caused by events associated Currency riskRelated: Exchange rate risk ![]() Currency risk sharingAn agreement by the parties to a transaction to share the currency risk associated with Default riskAlso referred to as credit risk (as gauged by commercial rating companies), the risk that an Discounted basisSelling something on a discounted basis is selling below what its value will be at maturity, Diversifiable riskRelated: unsystematic risk. Economic riskIn project financing, the risk that the project's output will not be salable at a price that will Equilibrium market price of riskThe slope of the capital market line (CML). Since the CML represents the Event riskThe risk that the ability of an issuer to make interest and principal payments will change because Exchange rate riskAlso called currency risk, the risk of an investment's value changing because of currency Exchange riskThe variability of a firm's value that results from unexpected exchange rate changes or the Fallout riskA type of mortgage pipeline risk that is generally created when the terms of the loan to be Financial riskThe risk that the cash flow of an issuer will not be adequate to meet its financial obligations. financial riskrisk to shareholders resulting from the use of debt. Firm-specific riskSee:diversifiable risk or unsystematic risk. Fixed price basisAn offering of securities at a fixed price. Flat price riskTaking a position either long or short that does not involve spreading. Flow-through basisAn account for the investment credit to show all income statement benefits of the credit Force majeure riskThe risk that there will be an interruption of operations for a prolonged period after a Foreign exchange riskThe risk that a long or short position in a foreign currency might have to be closed out Formula basisA method of selling a new issue of common stock in which the SEC declares the registration Funding riskRelated: interest rate risk Geographic riskrisk that arises when an issuer has policies concentrated within certain geographic areas, Herstatt riskThe risk of loss in foreign exchange trading that one party will deliver foreign exchange but the counterparty financial institution will fail to deliver its end of the contract. It is also referred to as settlement risk. High-Risk Small BusinessFirm viewed as being particularly subject to risk from an investors perspective. Idiosyncratic RiskUnsystematic risk or risk that is uncorrelated to the overall market risk. In other words, Inflation riskAlso called purchasing-power risk, the risk that changes in the real return the investor will Insolvency riskThe risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk. Interest rate riskThe risk that a security's value changes due to a change in interest rates. For example, a Interest Rate RiskPossibility that interest rates will rise during the term of a loan thereby increasing the annual cost of borrowing. judgmental method (of risk adjustment)an informal method of adjusting for risk that allows the decision maker Liquidity riskThe risk that arises from the difficulty of selling an asset. It can be thought of as the difference Market price of riskA measure of the extra return, or risk premium, that investors demand to bear risk. The Market riskrisk that cannot be diversified away. Related: systematic risk Market RiskThe amount of total risk that cannot be eliminated by portfolio market riskEconomywide (macroeconomic) sources of risk that affect the overall stock market. Also called systematic risk. Market RiskThe part of security's risk that cannot be eliminated by diversification. It is measured by the beta coefficient. market risk premiumrisk premium of market portfolio. Difference between market return and return on risk-free Treasury bills. Mortgage-pipeline riskThe risk associated with taking applications from prospective mortgage borrowers Nondiversifiable riskrisk that cannot be eliminated by diversification. Nonsystematic riskNonmarket or firm-specific risk factors that can be eliminated by diversification. Also Operating riskThe inherent or fundamental risk of a firm, without regard to financial risk. The risk that is operating risk (business risk)risk in firm’s operating income. Overnight delivery riskA risk brought about because differences in time zones between settlement centers Political riskPossibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of Price riskThe risk that the value of a security (or a portfolio) will decline in the future. Or, a type of Price value of a basis point (PVBP)Also called the dollar value of a basis point, a measure of the change in Product riskA type of mortgage-pipeline risk that occurs when a lender has an unusual loan in production or Purchasing-power riskRelated: inflation risk Rate riskIn banking, the risk that profits may decline or losses occur because a rise in interest rates forces up Regulatory pricing riskrisk that arises when regulators restrict the premium rates that insurance companies Reinvestment riskThe risk that proceeds received in the future will have to be reinvested at a lower potential Residual riskRelated: unsystematic risk Reverse price riskA type of mortgage-pipeline risk that occurs when a lender commits to sell loans to an RiskTypically defined as the standard deviation of the return on total investment. Degree of uncertainty of riskuncertainty; it reflects the possibility of differences between RiskThe degree of uncertainty associated with the return on an asset. RiskA state in which the number of possible future events exceeds the number of events that will actually occur, and some measure of probability can be attached to them. riskrisk measures the possibility that your investment may lose or gain value as compared to the expected rate of return. risk is different from uncertainty, which is not measurable. RiskCalculated chance of loss. Risk-adjustedreturn Return earned on an asset normalized for the amount of risk associated with that asset. risk-adjusted discount rate methoda formal method of adjusting for risk in which the decision maker increases the rate used for discounting the future cash flows to compensate for increased risk Risk-adjusted profitabilityA probability used to determine a "sure" expected value (sometimes called a Risk arbitrageSpeculation on perceived mispriced securities, usually in connection with merger and Risk averseA risk-averse investor is one who, when faced with two investments with the same expected Risk classA group of insureds who present similar risk to the insurance company. risk classes include - standard, preferred, nonsmoker, substandard, uninsurable. Risk classesGroups of projects that have approximately the same amount of risk. Risk controlled arbitrageA self-funding, self-hedged series of transactions that generally utilize mortgage Risk-free assetAn asset whose future return is known today with certainty. Risk-free rateThe rate earned on a riskless asset. Risk-free RateThe rate of return on an investment with known future benefits; a Risk-Free RateThe rate of return obtainable on government of Canada treasury bills. Risk indexesCategories of risk used to calculate fundamental beta, including (1) market variability, (2) Risk loverA person willing to accept lower expected returns on prospects with higher amounts of risk. Related to : financial, finance, business, accounting, payroll, inventory, investment, money, inventory control, stock trading, financial advisor, tax advisor, credit. |