An investment portfolio is a collection of various assets such as stocks, bonds, real estate, and other investment instruments owned by an individual or an organization to achieve financial goals.
An investor is a party who allocates capital to purchase an asset with the expectation of financial returns. Generally, investors are more diligent and conservative compared to speculators.
A joint audit is an audit conducted by two or more auditing firms who collaborate to prepare a single audit report, enhancing the overall audit quality and credibility.
Key Person Life and Health Insurance is a type of business insurance coverage designed to protect companies from the financial loss that can occur if a key employee becomes disabled or passes away.
LCH.Clearnet, now known simply as LCH, is a leading global clearing house that provides clearing and risk management services for various asset classes including equities, bonds, exchange-traded derivatives, commodities, and over-the-counter (OTC) derivatives.
Legging-In refers to entering into a hedging contract after becoming the debtor or creditor under a debt instrument. Any gain or loss from legging-in is deferred until the qualifying debt instrument matures or is disposed of in the future.
Level Premium is a type of insurance premium that remains constant throughout the duration of the policy, regardless of changes in the nature of the risk or the insured's life circumstances.
Leverage refers to the use of various financial instruments or borrowed capital—such as margin—to increase the potential return of an investment.
Liquidity risk refers to the potential risk that an investment cannot be liquidated during its life without significant costs or losses. This is particularly relevant in lending operations, where the ability to quickly convert an asset to cash is crucial.
LCH is a leading multi-asset clearing house established in 1888, providing risk management, netting, and settlement services. It became well-known as the International Commodities Clearing House before merging with Clearnet in 2003 to form LCH.Clearnet.
Loss exposure in insurance refers to areas in which the risk of loss exists. Four primary loss risk areas are property, income, legal vulnerability, and key personnel within an organization.
Management methods used to limit the extent of losses when they do happen. Practicing strict legal compliance with all environmental laws and safety procedures as well as maintaining good public relations is extremely important in managing loss reduction when unfortunate situations develop.
Manufacturers and Contractors Liability Insurance provides coverage for liability exposures that result from manufacturing and contracting operations. This type of insurance typically excludes activities of independent contractors, and damages to property caused by explosion, collapse, and underground property damage.
A Margin Call is a demand, usually resulting from the price decline of a security bought on margin, that a customer deposit enough money or securities to bring a margin account up to the initial margin or minimum maintenance requirements. If a customer fails to respond, securities in the account may be liquidated.
The difference between the level of activity at which an organization breaks even and a given level of activity greater than the breakeven point, especially the forecast level in a breakeven analysis. The margin of safety may be expressed in the same terms as the breakeven point, i.e., sales value, number of units, or percentage of capacity.
A clause in a loan agreement or bank facility stating that the loan will become repayable if there is a material change in the borrower's credit standing. The clause can be contentious because it is not always clear what constitutes a material change.
Coverage for actual or attempted robbery of money, securities, or other property within a mercantile (commercial) establishment.
The Minimax Principle is a decision criterion aimed at minimizing the maximum possible loss or regret. It involves selecting the outcome with the smallest potential loss, thereby aiming to achieve the least amount of regret in case of failure.
Modern Portfolio Theory (MPT) is an investment strategy aimed at balancing risk and return by systematically constructing diversified portfolios. This involves including both risky and risk-free securities that exhibit some degree of counteracting performance.
A Monte Carlo simulation is a technique used to understand the impact of risk and uncertainty in prediction and forecasting models. In finance, it is extensively applied to price complex derivatives, manage financial risk, and facilitate decision-making processes.
Moral hazard refers to the situation where an entity has the incentive to take on excessive risks because it does not fully bear the consequences of those risks. This is a common concern in sectors such as banking, insurance, and finance, particularly when entities are perceived as 'too big to fail' and expect potential government bailouts.
A Mortgage-Backed Security (MBS) is a type of asset-backed security that is secured by a collection of mortgages. These securities enable banks to lend more aggressively while transferring the associated risk to investors.
Murphy's Law is an administrative aphorism that asserts 'Anything that can go wrong, will go wrong.' It originated with developmental engineer Ed Murphy in 1949, following a laboratory technician's error.
A naked option refers to an options contract where the buyer or seller does not hold the underlying asset associated with the option. This type of position can expose the writer to unlimited losses or substantial gains.
A Name Position Bond, also known as a Fidelity Bond, is a type of insurance that helps protect employers if employees holding certain listed positions commit dishonest acts like stealing money.
The National Flood Insurance Program (NFIP) aims to reduce the impact of flooding on private and public structures by providing affordable insurance to property owners. Furthermore, it encourages communities to adopt and enforce floodplain management regulations.
A covenant in a loan agreement wherein the borrower commits to refrain from securing new borrowings during the loan's term or ensures equal and rateable security for any new borrowings, as specifically defined.
Netting is the process of offsetting matching sales and purchases against each other, particularly in the context of futures, options, and forward foreign exchange. It helps firms manage risks such as exchange-rate exposure and is often facilitated by a clearing house.
Non-recourse finance is a type of bank loan where the lender can only claim repayments from the project's profits, not from other borrower assets.
Off-balance-sheet (OBS) refers to assets or liabilities that do not appear on a company's balance sheet but potentially have a significant impact on the company's financial health.
A cognitive bias that leads individuals to be overly optimistic about the outcomes of their actions, frequently resulting in underestimation of risks, costs, and duration, while overestimating benefits.
A participation loan is a financial arrangement where multiple lenders share in providing a loan, typically with one lender acting as the lead to service the loan. This can distribute the risk and allow for larger loan amounts than a single lender might handle.
A performance bond is a type of contract surety bond that guarantees the performance of contractual obligations by a contractor or service provider. It assures the client that the project or service will be completed as per the agreed-upon standards and terms.
Perils refer to various risks that can cause damage to property, often covered under a homeowner's insurance policy.
An alternative plan implemented if the principal plan of action is unsuccessful; serves as a backup strategy to mitigate risks and ensure objectives are met. Common in various fields such as business, project management, and strategic planning.
An individual or entity that owns an insurance policy and has the right to exercise the policy's privileges.
In the world of finance, a portfolio refers to the collection of investments held by an individual or institution. This diversified set of holdings could include stocks, bonds, commodities, real estate, and other assets.
Portfolio reinsurance is a coverage mechanism where an insurance company's portfolio is ceded to a reinsurer, who reinsures a given percentage of a particular line of business. This approach allows the primary insurer to mitigate risk exposure by transferring some of its liabilities to the reinsurer.
The precautionary motive is the cause of an action taken to prevent something undesirable from occurring. For example, a homeowner puts the car in the garage at night to prevent it from being stolen.
Pro rata cancellation refers to the revocation of an insurance policy by an insurance company, which returns to the policyholder the unearned premium without reducing for expenses already paid.
Professional Indemnity Insurance (PII) is a type of insurance that provides coverage for professionals and businesses to protect against claims for negligence, errors, and omissions in the service or advice they provide to clients.
Property insurance is a type of insurance policy that provides financial reimbursement to the owner or renter of a structure and its contents in case of damage or theft. It also provides liability coverage against accidents that may occur on the property.
Prudence involves displaying foresight, caution, and discretion in one's actions. It implies being careful, measured, and avoiding careless or reckless behavior.
Pure Risk refers to situations where there is a risk of loss with no opportunity for gain. These conditions, such as fires, natural disasters, and liability issues, are where the need for insurance coverage is clearly indicated since there is only the risk of loss with no possibility of beneficial gain.
A put option is a financial contract that gives the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time.
A Quant, or quantitative analyst, is a professional with strong mathematical and computer skills who provides numerical and analytical support services, typically in the finance sector.
RAG Rating is a system for monitoring and reporting on the progress of a complex, longer-term project using a color-coded scheme to identify areas needing urgent action.
Records Management refers to a system used to collect, record, store, and eventually discard information. Effective records management ensures that information is correctly managed throughout its lifecycle, supporting compliance, operational efficiency, and risk management.
Reinsurance is an agreement by which one insurer indemnifies another insurer in part, or in total, for the risks of a policy issued by that other insurer, helping manage and mitigate potential losses.
A Retail Credit Bureau is a specialized type of credit bureau that focuses on collecting and maintaining consumer credit information specifically related to retail transactions and credit accounts.
The measurement and analysis of the risk associated with business, financial, and investment decisions. It involves the identification of risk, the classification of risks in regard to their impact and likelihood, and a consideration of how they might best be managed.
Understanding risk-averse investors who prioritize security over potential higher returns.
Risk avoidance involves management methods utilized to bypass as much situational risk as possible. While the elimination of all risk is rarely feasible, in many situations it is prudent to develop strategies where specific risks can be circumvented.
Risk management is a process that aims to help organizations understand, evaluate, and take action on all their risks to maximize their value. This can include taking out insurance or hedging through derivatives.
Risk retention is a method of self-insurance where an organization retains a reserve fund to offset unexpected financial claims. It involves setting aside funds to handle potential future losses and can be an effective risk management strategy under certain conditions.
Risk vs. Reward is a financial concept that attempts to compare the potential fluctuations, especially the downside, with potential benefits to determine whether the proposed investment or cost is worthwhile.
RAROC is a performance measurement tool used by financial institutions to determine the risk-adjusted profitability of various units within the organization.
Methods used to reduce the amount of inherent risk. The four basic risk control techniques are Risk Avoidance, Risk-Control Transfer, Loss Prevention, and Loss Reduction.
Risk-financing techniques involve strategies used to reduce financial risk through methods such as risk retention or risk-financing transfer.
A 'safe haven' refers to an investment that is expected to retain or increase its value during times of market turbulence. These assets are often turned to in order to protect capital when risky investments begin to lose value.
The safety margin is the excess of actual sales over break-even sales, providing a buffer that measures how much sales can drop before incurring a loss.
A detailed explanation and examples concerning the term 'Sans Recours' or 'Without Recourse', often used in the world of finance and accounting to limit the liability of the seller.
A secured liability is a debt against which the borrower has pledged sufficient assets as collateral to protect the lender in case of default.
Self-insurance refers to the process of protecting against loss by setting aside one's own money rather than purchasing insurance from a third party. This can be systematically done by establishing a reserve fund.
A method used in decision making to evaluate the impact of variations in key variables on projected outcomes, helping to identify the degree of risk associated with a decision.
Sensitivity Analysis is a financial modeling tool used to predict the outcome of a decision given a certain range of variables.
The Society of Actuaries (SOA) is an organization dedicated to the advancement and professional development of actuaries, providing invaluable resources, designations like the FSA (Fellow, Society of Actuaries), and fostering collaborations with members, volunteers, and other actuarial organizations.
In financial trading, a square position refers to an open position that has been covered or hedged, neutralizing the trader’s exposure and risk associated with price movements.
Staggering Maturities is a technique used by bond investors to lower risk by diversifying investments across bonds with varying maturities. This approach helps in hedging against interest rate movements and mitigating the volatility associated with long-term bonds.
The Standard Fire Policy is a foundational insurance contract designed to provide coverage against fire-related damages to properties. It is essential for homeowners and businesses alike to protect their assets from unforeseen fire incidences.
Static risk refers to risks with a constant level of uncertainty regarding the outcome or payoff. This type of risk is not influenced by market fluctuations or evolving factors and typically remains unchanged over time.
A stop-loss order is a directive given by an investor to a broker to sell a financial instrument, such as a stock, when it reaches a specified price point in order to cap the investor's loss.
Supply risk refers to the inherent risks associated with the unavailability or disruption of raw materials necessary for the operation of a business or project.
A surety bond is a legally binding contract involving three parties: the principal, the surety, and the obligee, where the surety agrees to fulfill the obligation if the principal defaults.
Systems Development Controls refer to the internal controls that ensure the development of computerized systems is properly managed and secured. These measures mitigate risks by enforcing structured protocols such as the segregation of duties.
To speculate, usually with the knowledge that the investment is highly risky, often in the context of buying securities.
Take-or-pay is an arrangement where a customer commits to purchasing a certain quantity of a product over a specified period, often at a predetermined price. If the customer fails to meet the agreed-upon purchase quantity, they must still pay the seller. This contract structure protects the buyer against price increases and secures the seller against price decreases.
Technological risk is the inherent risk in project financing schemes that the newly designed plant or equipment will not operate to spec, and the broader risk to a business from changing technology.
Transaction exposure refers to the risk that a firm's exposure to exchange-rate fluctuations will impact the value of anticipated cash flows from a transaction when the contractual obligation is settled.
Transportation insurance is a type of insurance coverage that protects goods and merchandise while they are in transit from one location to another, whether that takes place via road, rail, sea, or air.
Trip Cargo Insurance protects goods in transit for a single trip, covering potential risks associated with transportation.
A foundational report providing directors of UK listed companies with guidance on risk management, internal controls, and their obligations under the Corporate Governance Code.
Umbrella Liability Insurance is excess liability coverage that provides additional protection beyond the limits of a basic business liability insurance policy such as the Owners, Landlords, and Tenants Liability Policy.
An umbrella policy is an insurance policy providing additional liability coverage over and above the limits of a basic insurance liability policy. It is designed to provide extra protection.
An uncovered option, also known as a naked option, refers to an option contract where the writer of the option does not hold the underlying security or the sufficient cash to cover the position, making it a high-risk strategy.
An individual who has insufficient insurance coverage to fully compensate for losses in the event of life or property damage.
In finance, an underlying asset is the security, index, or other financial instrument that the value of a derivative is based on. Understanding the nature of the underlying asset is crucial for evaluating and managing the risk associated with derivatives.
In the contexts of insurance and investments, underwriting involves assuming risk in exchange for a premium or facilitating the issuance and resale of securities, respectively.
An uninsurable risk is a risk that is considered too extreme or too difficult to quantify, thereby making it undesirable for insurance companies to provide coverage.
Unloading refers to the act of offloading or selling large quantities of an asset, typically at lower than market prices, generally to raise cash quickly or influence market conditions.
Unsecured Loan Stock (ULS) is a type of loan stock that is not backed by any assets or collateral, making it riskier for lenders compared to secured loan stocks.
Unwinding a trade involves reversing a securities transaction through an offsetting transaction, typically to close out a position by selling or buying back the corresponding amounts of the security originally traded.
Vacant property refers to real estate that is currently unoccupied and not being used, whether it is residential, commercial, or industrial. Such properties can present unique challenges and opportunities for owners and managers.
Value-at-Risk (VaR) is a statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over a specific time frame.
In finance and economics, the term 'volatile' refers to the tendency for rapid and extreme fluctuations in the price of a particular asset such as stocks, bonds, or commodities. Market-related volatility in stocks is typically measured by the Beta Coefficient.
The Weakest Link Theory states that the reliability of a system is determined by its weakest component. The entire system or process can only be as strong as its weakest link.
Wrongful trading refers to the act of continuing to trade when a company has no reasonable prospect of avoiding insolvency. Directors can be held personally liable if they knew, or should have known, about the company's financial predicament.
