Understanding Financial Risk and Risk Measures

Financial Mathematics is a technical branch of study that a lot of students struggle with. Here at myhomeworkhelp.com we have the solutions to all your homework worries. Our detailed Risk Measure homework help will help you a clear understanding of the important concepts of Risk and Risk Measures in Financial Mathematics.

What is a Risk Measure?

Our Risk Measure assignment help will explain that in the context of Financial Mathematics, a Risk Measure refers to two things.

  • It is the process which ascertains the quantity of a firm’s assets that need to be retained as a contingency to cover the company’s liability to a Risk.
  • It also refers to these contingent reserves of assets themselves which are usually kept aside in the form of currency.

What is the purpose of a Risk Measure?

  • A Risk Measure provides a safety reserve that ensures that the company has the ability to stay afloat for some time despite the incurrence of heavy losses in the form of bad investments, loan defaulters or the failure of a new product line in the market.
  • For financial institutions that operate under the purview of a regulatory body, it is an official directive that must be followed. Your Risk Measure homework help will explain the purpose and function of regulatory bodies.
  • All financial institutions like banks and insurance companies are required to keep aside a substantial amount of its assets in reserve to ensure its ability to remain solvent in the face of heavy financial loss. This is essential as regulatory bodies like reserve banks lend to other banks and this contingent fund limits the reserve banks’ liability if a debtor declares bankruptcy.
  • Risk Measures reduce the probability of financial institutions going bankrupt by ensuring that they have adequate reserves to remain solvent.

Read your Risk Measure assignment help thoroughly in order to understand the need for such measures.

Common Risk Measures

Our Risk Measure homework help will elucidate upon the types of Risk Measures favoured by most firms and regulators:

  • Value at Risk or VaR – It is an assessment of investment risk. It estimates the extent of loss an investment is likely to incur in a fixed time period keeping in mind the prevalent market conditions.
  • Expected Short fall–A Risk Measure that assesses market risk and credit risk. It is the minimum return expected in the worst case scenario.
  • Tail Value at Risk or TVaR – It is an evaluation of investment risk that calculates the potential for loss in case of drastic changes in market conditions. It is a step up from the VaR as it provides contingent reserves for events that occur outside anticipated probability levels.
  • Entropic Risk Measure – Is a variable measure that issues different risk values depending on a firm’s risk aversion and the exponential utility of an investment.
  • Superhedging Price – A coherent risk measure that evaluates the smallest amount required at the present for an admissible portfolio to offset the value of potential losses incurred by the initial portfolio in the future.

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