Credit risk: The risk of loss of principal or loss of a financial reward stemming from a

borrower's failure to repay a loan or otherwise meet a contractual obligation. Credit risk
arises whenever a borrower is expecting to use future cash flows to pay a current debt.
Investors are compensated for assuming credit risk by way of interest payments from the
borrower or issuer of a debt obligation.
Credit risk is closely tied to the potential return of an investment, the most notable being that
the yields on bonds correlate strongly to their perceived credit risk.
The higher the perceived credit risk, the higher the rate of interest that investors will demand
for lending their capital. Credit risks are calculated based on the borrowers' overall ability to
repay. This calculation includes the borrowers' collateral assets, revenue-generating ability
and taxing authority (such as for government and municipal bonds).
Credit risks are a vital component of fixed-income investing, which is why ratings agencies
such as S&P, Moody's and Fitch evaluate the credit risks of thousands of corporate issuers
and municipalities on an ongoing basis.

Market risk-The possibility for an investor to experience losses due to factors that
affect the overall performance of the financial markets. Market risk, also called "systematic
risk," cannot be eliminated through diversification, though it can be hedged against. The risk
that a major natural disaster will cause a decline in the market as a whole is an example of
market risk. Other sources of market risk include recessions, political turmoil, changes in
interest rates and terrorist attacks.
The two major categories of investment risk are market risk and specific risk. Specific risk,
also called "unsystematic risk," is tied directly to the performance of a particular security and
can be protected against through investment diversification. One example of unsystematic
risk is that a company, whose stock you own will declare bankruptcy, thus making your stock
worthless.

Foreign exchange risk: 1. the risk of an investment's value changing due to

changes in currency exchange rates.
2. The risk that an investor will have to close out a long or short position in a foreign
currency at a loss due to an adverse movement in exchange rates. Also known as "currency
risk" or "exchange-rate risk".
This risk usually affects businesses that export and/or import, but it can also affect investors

making international investments. For example, if money must be converted to another

currency to make a certain investment, then any changes in the currency exchange rate will
cause that investment's value to either decrease or increase when the investment is sold
and converted back into the original currency.

Price risk: The risk of a decline in the value of a security or a portfolio. Price risk is
the biggest risk faced by all investors. Although price risk specific to a stock can be
minimized through diversification, market risk cannot be diversified away. Price risk, while
unavoidable, can be mitigated through the use of hedging techniques.
Price risk also depends on the volatility of the securities held within a portfolio. For example,
an investor who only holds a handful of junior mining companies in his or her portfolio may
be exposed to a greater degree of price risk than an investor with a well-diversified portfolio
of blue-chip stocks. Investors can use a number of tools and techniques to hedge price risk,
ranging from relatively conservative decisions such as buying put options, to more
aggressive strategies including short-selling and inverse ETFs.

interest rate risk: The risk that an investment's value will change due to a change in the
absolute level of interest rates, in the spread between two rates, in the shape of the yield
curve or in any other interest rate relationship. Such changes usually affect securities
inversely and can be reduced by diversifying (investing in fixed-income securities with
different durations) or hedging (e.g. through an interest rate swap).
Interest rate risk affects the value of bonds more directly than stocks, and it is a major risk to
all bondholders. As interest rates rise, bond prices fall and vice versa. The rationale is that
as interest rates increase, the opportunity cost of holding a bond decreases since investors
are able to realize greater yields by switching to other investments that reflect the higher
interest rate. For example, a 5% bond is worth more if interest rates decrease since the
bondholder receives a fixed rate of return relative to the market, which is offering a lower
rate of return as a result of the decrease in rates.

derivative risk : A security whose price is dependent upon or derived from one or more

underlying assets. The derivative itself is merely a contract between two or more parties. Its
value is determined by fluctuations in the underlying asset. The most common underlying
assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Most derivatives are characterized by high leverage.
Futures contracts, forward contracts, options and swaps are the most common types of
derivatives. Derivatives are contracts and can be used as an underlying asset. There are
even derivatives based on weather data, such as the amount of rain or the number of sunny
days in a particular region.
Derivatives are generally used as an instrument to hedge risk, but can also be used for
speculative purposes. For example, a European investor purchasing shares of an American
company off of an American exchange (using U.S. dollars to do so) would be exposed to
exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase
currency futures to lock in a specified exchange rate for the future stock sale and currency
conversion back into Euros.

Operation risk : A form of risk that summarizes the risks a company or firm undertakes
when it attempts to operate within a given field or industry. Operational risk is the risk that is
not inherent in financial, systematic or market-wide risk. It is the risk remaining after
determining financing and systematic risk, and includes risks resulting from breakdowns in
internal procedures, people and systems.
Operational risk can be summarized as human risk; it is the risk of business operations
failing due to human error. Operational risk will change from industry to industry, and is an
important consideration to make when looking at potential investment decisions. Industries
with lower human interaction are likely to have lower operational risk.

Liquidity risk : The risk stemming from the lack of marketability of an investment that
cannot be bought or sold quickly enough to prevent or minimize a loss. Liquidity risk is
typically reflected in unusually wide bid-ask spreads or large price movements (especially to
the downside). The rule of thumb is that the smaller the size of the security or its issuer, the
larger the liquidity risk.
Although liquidity risk is largely associated with micro-cap and small-cap stocks or

securities, it can occasionally affect even the biggest stocks during times of crisis. The
aftermath of the 9/11 attacks and the 2007-2008 global credit crisis are two relatively recent
examples of times when liquidity risk rose to abnormally high levels. Rising liquidity risk
often becomes a self-fulfilling prophecy, since panicky investors try to sell their holdings at
any price, causing widening bid-ask spreads and large price declines, which further
contribute to market illiquidity and so on.

Downside risk: An estimation of a security's potential to suffer a decline in value if the

market conditions change, or the amount of loss that could be sustained as a result of the
decline. Downside risk explains a "worst case" scenario for an investment, or how much the
investor stands to lose. Some investments have a finite amount of downside risk, while
others have infinite risk. The purchase of a stock, for example, has a finite amount of
downside risk; the investor can lose his or her entire investment. The sale of a stock,
however, as accomplished through a short sale (or "selling short") entails unlimited
downside risk, since the price of the security could continue rising indefinitely.
Investors, traders and analysts use a variety of technical and fundamental metrics to
estimate the likelihood that an investment's value will decline, including historical
performance and standard deviation calculations. In general, many investments that have a
greater potential for downside risk also have an increased potential for positive rewards.
Investors often compare the potential risks associated with a particular investment to its
possible rewards.
Downside risk is in contrast to upside potential, or the likelihood that a security's value will
increase.

Asset risk: Any asset that carries a degree of risk. Risk asset generally refers to assets
that have a significant degree of price volatility, such as equities, commodities, high-yield
bonds, real estate and currencies. Specifically in the banking context, risk asset refers to an
asset owned by a bank or financial institution whose value may fluctuate due to changes in
interest rates, credit quality, repayment risk and so on. The term may also refer to equity
capital in a financially stretched or near-bankrupt company, as its shareholders claims
would rank below those of the firms bondholders and other lenders.

Investor appetite for risk assets swings considerably over time. The period from 2003 to
2007 was one of huge risk appetite, as rampant investor demand drove up prices of most
assets associated with above-average risk, including commodities, emerging markets,
subprime mortgage-backed securities, as well as currencies of commodity exporters such
as Canada and Australia. The global recession of 2008 to 2009 triggered massive aversion
for risk assets, as capital fled to the quintessential safe-haven of U.S. Treasuries.
Since March 2009, as swings in risk appetite became more pronounced due to global
macroeconomic concerns, such as European sovereign debt (in 2010 and 2011) and the
U.S. fiscal cliff (in 2012), market-watchers began referring to times when investors have
substantial appetite for risk assets as "risk on" periods and intervals of risk aversion as "risk
off" periods.

Institutional risk:
Income risk: The risk that the income stream paid by a fund will decrease in
response to a drop in interest rates. This risk is most prevalent in money market and other
short-term income fund strategies, rather than longer term strategies that lock in interest
rates. This is an extension of the interest rate risk on an individual bond.

Income recognition risk :

Capital adequacy ratio: A measure of a bank's capital. It is expressed as a
percentage of a bank's risk weighted credit exposures.

Also known as "Capital to Risk Weighted Assets Ratio (CRAR)."

This ratio is used to protect depositors and promote the stability and efficiency of financial
systems around the world.

Two types of capital are measured: tier one capital, which can absorb losses without a bank
being required to cease trading, and tier two capital, which can absorb losses in the event of
a winding-up and so provides a lesser degree of protection to depositors.

SARFAESI ACT, 2002

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002, allow banks and financial institutions to auction properties (residential and
commercial) when borrowers fail to repay their loans. It enables banks to reduce their nonperforming assets (NPAs) by adopting measures for recovery or reconstruction.
When do properties fall under this Act?
If a borrower defaults on repayment of his/her home loan for six months at stretch, banks give
him/her a 60-day period to regularize the repayment, that is, start repaying. On failure to do so,
banks declare the loan an NPA and auction it to recover the debt

Securitation:
Process of converting illiquid assets or group of assets through fin
engineering and converting them into securities for institutional investors to
interest in them.
It has three parties
1) Seller
2) Issuer: who buys the risky loan.
3) Investor: Institutional investors who will invest on these loans.