Glossary - Financial Risk Terminology

Arbitrage
Arbitrage is a trading strategy which seeks to make a profit by exploiting price differences in same or similar financial instruments, on different markets or in different forms.
Asian Option
An Asian option is a financial derivative and its final pay-off is determined by the average price of the underlying asset at specific dates or during a specific pricing window.
Asset and Liability Management (ALM)
The Asset and Liability Management (ALM) function in a bank manages the risks caused by asset and liability mismatches as well as the interest rate risk in the bank's banking book and the bank's liquidity risk.
Asset Backed Security (ABS)
Asset-backed securities, backed by pools of mortgage loans or other types of securitizable cash flow generating assets, are sold to investors who then receive payments based on the cash flows generated by the assets in the underlying pool.
Asset Liability Committee (ALCO)
Asset Liability Committee (ALCO) is typically a committee of senior managers and board members tasked with executing and overseeing the banks ALM activities.
Asset Management Company (AMC)
An Asset Management Company (AMC) is an often separate entity tasked with managing assets on behalf of a principal; in banking and credit risk management, it typically refers to the long-term management a bad bank that manages, with a long-term mandate, non-performing loans and assets to maximize the maximal recovery value of those.
Asset Transformation
Asset transformation is the process of creating a new asset (loan) from liabilities (deposits) with different characteristics by converting small denomination, immediately available and relatively risk free bank deposits into loans--new relatively risky, large denomination asset--that are repaid following a set schedule.
Assets
Assets are tangible or intangible claims with economic value that an individual, corporation or other entity owns or controls with the expectation that it will provide future benefit.
Audit
An audit is the unbiased examination, analysis, and evaluation of an organization's financial position, business activities and internal processes executed internally, by employees of the organization, and/or externally, by an outside entity.
Backwardation
Backwardation occurs when the price of futures with longer maturities are less than prices of futures with shorter maturities; it is the opposite of contango.
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