These models assess and quantify various financial risks, such as market, credit, operational, and liquidity risks. They may involve statistical analysis, simulation, and scenario analysis to estimate the probability and impact of potential risks on a company’s financial performance.
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- Market risk models. These models are used to assess the risk associated with changes in market conditions, such as fluctuations in interest rates, stock prices, and foreign exchange rates.
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- Credit risk models. These models are used to assess the risk associated with the likelihood of a borrower defaulting on a loan or bond.
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- Liquidity risk models. These models are used to assess the risk associated with the ability to buy or sell financial assets in the market without causing significant price movements.
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- Operational risk models. These models are used to assess the risk associated with the likelihood of losses resulting from internal or external events, such as fraud, errors, or system failures.
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- Reputational risk models. These models are used to assess the risk associated with the potential negative impact on a company’s reputation resulting from its actions or the actions of its employees.
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- Systemic risk models. These models are used to assess the risk associated with the potential impact of a failure in one financial institution or market on the entire financial system.