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C R E D I T R I S K A N D M A R K E T R I S K
Research andAnalysis:
ALEXANDERCHRISTODOULAKIS
Research and AnalysisThe ever-changing climate of our global economy has
forced lending institutions, investment firms, and
corporations to adjust, advance, and "bulletproof" their
practices.
In recent years, we have seen a number of instances of
economic turmoil and bankruptcy creating a greater
need for better risk management assessment tools and
risk management techniques.
Despite the increased use of
mitigation techniques, research and
analysis tools are crucial and equally
important when managing risk as
research and analysis functions as the
first protection layer for investors and
financial institutions against
excessive risk.
When a well-established analysis and
research force exists in a financial
institution procedures and scientific
techniques will be properly evaluated
and will , in turn, support the risk
management units of the institution.
Financial RisksFinancial risks can generally be broken down into several categories:
Market Credit LiquidityOperational Legal Regulatory Human factorModel
For the purpose of this slideshow, we will only be focusing on the first2: market and credit risk, in order to understand why research and
analysis are so crucial
Market RiskThe risk that changes in financial market prices
and rates. Market risk assessment is needed so
that decision makers and risk managers have the
most up to date information to make decisions.
Market risk can be broken down further into equity
market, interest rate, foreign exchange, and
commodity risk.
The future of rates and asset prices cannot always
be predicted through research and analysis, but it
can provide excellent insight for proper instrument
selection when it comes to hedging an exposure.
Credit RiskThe risk that a change in the credit quality of a counterparty
will affect the value of a lender's position. Investors are
exposed to the risk that the counterparty may be
downgraded by a rating system.
The credit evaluation process is essential when analyzing
the business risks, financial risks, capital structure analysis,
and adequate sources of repayment for the protection of
the borrower.
Credit Evaluation ProcessTraditionally, the credit evaluation process takes into
account a variety of different sources to assess the
risk for the lender. It includes the rigorously analyzing
of balance sheets and income statements and an
extensive due dil igence process. Although credit
scoring methodologies are also heavily applied in the
assessment of credit risk of prospective borrowers,
these methodologies rely on the use of operational
research, statistical and data mining models and are
usually being provided by external vendors
Even though the existence of a trend of relaxing lendingstandards due to the increased use of risk transferring
techniques, the research and analysis function along withthe assessment of the overall financial, economic and
political environment where a firm operates, should remainat the core of every sustainable investment and credit
decision making.
ALEXANDERCHRISTODOULAKIS