A Method for Measuring of Maximum Possible Loss of Catastrophic Risk
Subject Areas : Financial Knowledge of Securities Analysis
Keywords:
Abstract :
Nowadays, the distrust of future has increased because of theextension of different dangers and undesirable accidents, part ofwhich results from economical, social activities. The concepts of"Peril" or "risk" in financial markets are basic issues which havespecial complexity. Since the exact conception of Peril appearance isnot existing, financial markets need approaches to control andmanage the risk. It has to be considered that the most importantconception of peril appearance is feeling the financial lossappearance. In the other words, the risk of undesirable accidentsappearance. In the new financial risk management literature,desirable risk is noticed more than the desirable and undesirablerisks. Truly, in the new financial risk management standards, acompany or enterprise first of all examines the undesirable risks, thuslosses which are origin of risk (in literature, the value at risk) arearranged follow (figure 1.):1. Expected Loss (EL): Contains losses which need businessactivities.2. Unexpected Loss (UEL): Contains losses which areunconventional but foreseeable. These are losses which companyor enterprise has to accept within the business activities. 3. Stress Loss (SL): Contains losses, although unsuspected butcompanies or enterprises have to be able to continue theiractivities with them.It is important to notice that investment has a close relation withthe risk of portfolio and this relation is shown in the probabilitydistribution function of risk of portfolio.