Key Terms Related to Risk Management

Most commonly used terms in Risk Management:

The entire paradigm, of risk management is very complex and consists of terms which could be properly understood in coherence. Since risk management is closely related to financial losses, I have included terms related to the stock markets just to ensure a better understanding of the financial instruments present in the market.

Here is an attempt to put together the most commonly used terms in risk management:

Risk: Uncertainly of occurrence of an event whether positive or negative (In business perspective, risk is generally considered to be an event which exposes you to a negative position)

Rewards: The returns expected with investments which have been materialized

Potential Loss:  Any deficit of funds which has may or may not been accounted or estimated prior to occurrence of event 

Probability: Likelihood of occurrence of a risk event / Possibility of in a position of exposure 

Exposure: Severity of potential loss associated with a risk which is determined by multiplying the probability of occurrence with potential losses 

Impact: Effect of risk from a qualitative perspective; for example impact of risk in terms of cost is different from impact of risk related to health on human life.

Hedging/ Hedge: An investment made with an intention to offset any loss in other investment. Essentially, it is diversifying investments to ensure minimal loss