Plain-English definitions of the risk terms for FRM study. Simplified for learning; GARP’s curriculum is authoritative.
| Term | Definition |
|---|---|
| Value at Risk (VaR) | The loss not expected to be exceeded at a given confidence over a horizon. |
| Expected shortfall | The average loss in the tail beyond VaR; a coherent risk measure. |
| Market risk | Risk of loss from moves in prices, rates, FX or commodities. |
| Credit risk | Risk that a counterparty fails to meet an obligation. |
| Operational risk | Risk of loss from people, processes, systems or external events. |
| Liquidity risk | Risk of being unable to fund or trade without large cost. |
| Probability of default (PD) | The chance a borrower defaults over a period. |
| Loss given default (LGD) | The share of exposure lost if default occurs. |
| Exposure at default (EAD) | The amount at risk at the time of default. |
| Duration | A bond’s price sensitivity to interest-rate changes. |
| Convexity | How a bond’s duration changes as yields change. |
| Basis risk | Risk that a hedge and the hedged item move differently. |
| Delta | An option’s price sensitivity to the underlying’s price. |
| Volatility | The standard deviation of returns; a key risk input. |
| Stress testing | Estimating losses under severe but plausible scenarios. |
| Backtesting | Checking a risk model against actual outcomes. |
| Counterparty risk | Credit risk that the other side of a trade defaults. |
| Hedge | A position taken to offset a specific risk. |