|Risk controlled arbitrage|
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Definition of Risk controlled arbitrage
Risk controlled arbitrage
A self-funding, self-hedged series of transactions that generally utilize mortgage
The simultaneous buying and selling of a security at two different prices in two different markets,
The purchase of securities on one market for immediate resale on
Transactions designed to make a sure profit from inconsistent prices.
Yield curve option-pricing models.
An alternative model to the capital asset pricing model developed by
People who search for and exploit arbitrage opportunities.
The amount of total risk that can be eliminated by diversification by
The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk.
The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for
risk of a firm measured from the standpoint of an investor who holds a highly diversified portfolio.
The risk that the cash flow of an issuer will be impaired because of adverse economic
The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.
The risk that a foreign debtor will be unable to pay its debts because of business events,
Related: Unsystematic risk
See asset-specific risk
The risk that a project will not be brought into operation successfully.
A service that provides for a single presentation of checks each day (typically in
Controlled foreign corporation (CFC)
A foreign corporation whose voting stock is more than 50% owned
The risk that the other party to an agreement will default. In an options contract, the risk
Country financial risk
The ability of the national economy to generate enough foreign exchange to meet
Country risk General
Level of political and economic uncertainty in a country affecting the value of loans or
Covered interest arbitrage
A portfolio manager invests dollars in an instrument denominated in a foreign
The risk that an issuer of debt securities or a borrower may default on his obligations, or that the
Financial and moral risk that an obligation will not be paid and a loss will result.
Refers to the volatility of returns on international investments caused by events associated
Taking advantage of divergences in exchange rates in different money markets by
Related: Exchange rate risk
Currency risk sharing
An agreement by the parties to a transaction to share the currency risk associated with
Also referred to as credit risk (as gauged by commercial rating companies), the risk that an
Related: unsystematic risk.
In project financing, the risk that the project's output will not be salable at a price that will
Equilibrium market price of risk
The slope of the capital market line (CML). Since the CML represents the
The risk that the ability of an issuer to make interest and principal payments will change because
Exchange rate risk
Also called currency risk, the risk of an investment's value changing because of currency
The variability of a firm's value that results from unexpected exchange rate changes or the
A type of mortgage pipeline risk that is generally created when the terms of the loan to be
The risk that the cash flow of an issuer will not be adequate to meet its financial obligations.
risk to shareholders resulting from the use of debt.
See:diversifiable risk or unsystematic risk.
Flat price risk
Taking a position either long or short that does not involve spreading.
Force majeure risk
The risk that there will be an interruption of operations for a prolonged period after a
Foreign exchange risk
The risk that a long or short position in a foreign currency might have to be closed out
Related: interest rate risk
risk that arises when an issuer has policies concentrated within certain geographic areas,
The 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 Business
Firm viewed as being particularly subject to risk from an investors perspective.
Unsystematic risk or risk that is uncorrelated to the overall market risk. In other words,
An investment/trading strategy that exploits divergences between actual and theoretical
Also called purchasing-power risk, the risk that changes in the real return the investor will
The risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk.
Interest rate risk
The risk that a security's value changes due to a change in interest rates. For example, a
Interest Rate Risk
Possibility 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
The risk that arises from the difficulty of selling an asset. It can be thought of as the difference
Market price of risk
A measure of the extra return, or risk premium, that investors demand to bear risk. The
risk that cannot be diversified away. Related: systematic risk
The amount of total risk that cannot be eliminated by portfolio
Economywide (macroeconomic) sources of risk that affect the overall stock market. Also called systematic risk.
The part of security's risk that cannot be eliminated by diversification. It is measured by the beta coefficient.
market risk premium
risk premium of market portfolio. Difference between market return and return on risk-free Treasury bills.
The risk associated with taking applications from prospective mortgage borrowers
risk that cannot be eliminated by diversification.
Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also
The 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 risk
A risk brought about because differences in time zones between settlement centers
Possibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of
The risk that the value of a security (or a portfolio) will decline in the future. Or, a type of
A type of mortgage-pipeline risk that occurs when a lender has an unusual loan in production or
Related: inflation risk
In banking, the risk that profits may decline or losses occur because a rise in interest rates forces up
Regulatory pricing risk
risk that arises when regulators restrict the premium rates that insurance companies
The risk that proceeds received in the future will have to be reinvested at a lower potential
Related: unsystematic risk
Reverse price risk
A type of mortgage-pipeline risk that occurs when a lender commits to sell loans to an
Typically defined as the standard deviation of the return on total investment. Degree of uncertainty of
uncertainty; it reflects the possibility of differences between
The degree of uncertainty associated with the return on an asset.
A 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.
risk 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.
Calculated chance of loss.
return Return earned on an asset normalized for the amount of risk associated with that asset.
risk-adjusted discount rate method
a 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
A probability used to determine a "sure" expected value (sometimes called a
Speculation on perceived mispriced securities, usually in connection with merger and
A risk-averse investor is one who, when faced with two investments with the same expected
A group of insureds who present similar risk to the insurance company. risk classes include - standard, preferred, nonsmoker, substandard, uninsurable.
Groups of projects that have approximately the same amount of risk.
An asset whose future return is known today with certainty.
The rate earned on a riskless asset.
The rate of return on an investment with known future benefits; a
The rate of return obtainable on government of Canada treasury bills.
Categories of risk used to calculate fundamental beta, including (1) market variability, (2)
A person willing to accept lower expected returns on prospects with higher amounts of risk.
The process of identifying and evaluating risks and selecting and managing techniques to
Insensitive to risk.
Risk of Collection
Chance that a borrower or trade debtor will not repay an obligation as promised.
The reward for holding the risky market portfolio rather than the risk-free asset. The spread
The additional rate of return required on a risky project
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