Valuation risk

Valuation risk is the risk that an entity suffers a loss when trading an asset or a liability due to a difference between the accounting value and the price effectively obtained in the trade. In other words, valuation risk is the uncertainty about the difference between the value reported in the balance sheet for an asset or a liability and the price that the entity could obtain if it effectively sold the asset or transferred the liability (the so-called "exit price"). This risk is especially significant for financial instruments with complex features and limited liquidity, that are valued using internally developed pricing models. Valuation errors can result for instance from missing consideration of risk factors, inaccurate modeling of risk factors, or inaccurate modeling of the sensitivity of instrument prices to risk factors. Errors are more likely when models use inputs that are unobservable or for which little information is available, and when financial instruments are illiquid so that the accuracy of pricing models cannot be verified with regular market trades. According to the International Financial Reporting Standards, or IFRS, entities must classify their financial instruments in different categories, depending on their business model and their intention to trade such instruments or keep them in their balance sheet. The classification of financial instruments determines the methodology for their valuation. The admitted categories are: Held to Collect (HTC), measured at fair value on first-time recognition and at amortized cost afterwards Fair Value Through Other Comprehensive Income (FVTOCI), measured at fair value with changes in fair value recorded in an equity reserve Fair Value Through Profit & Loss (FVTP&L), measured at fair value with changes in fair value recorded in the profit and loss statement The fair value is therefore a key concept in accounting for financial instruments. The accounting principle IFRS 13 defines the rules for the determination of fair value.

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Valuation risk

Risk

In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environment), often focusing on negative, undesirable consequences. Many different definitions have been proposed. The international standard definition of risk for common understanding in different applications is "effect of uncertainty on objectives".

Systemic risk

In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to the risk associated with any one individual entity, group or component of a system, that can be contained therein without harming the entire system. It can be defined as "financial system instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries".

Introduction to Financial Valuation FIN-401: Introduction to finance

Covers financial valuation models, risk-return trade-off, firm analysis, and financing decisions.

Financial Valuation and Decision Making MGT-482: Principles of finance

Covers financial valuation models, risk-return trade-offs, and firm analysis for value enhancement.

Market Structure: Portfolio, Arbitrage, and Consumption FIN-609: Asset Pricing

Explores market structure, portfolio holdings, arbitrage, state prices, and optimal consumption-portfolio choices.