Dealing with financial instruments is inherently risky. The stock market is volatile and largely unpredictable; creditors and debtors are subject to unexpected changes in their circumstances.
To account for this, financial institutions and investors must find ways to identify and mitigate key sources of risk. To do so, they’ll often turn to risk analysis software and similar risk management tools. These solutions help evaluate financial instruments and take guesswork out of investment decisions by anchoring them in a solid data foundation.
Risk analysis is the practice of identifying and evaluating potential risks. Every investor must accept a certain degree of risk. Without it, there’s little chance of making a return on investment.
By assessing various risk factors and their likelihood, investors can make them more predictable and manageable. The end goal is not to eliminate risk altogether. Instead, it’s about making this risk transparent, predicting its potential impact, and trying to minimize it.
There are a number of risks associated with financial instruments and investments in the stock market. These include:
This is the chance that the issuers or backers of a financial instrument may fail to meet their commitments. It’s also known as “credit risk.” The less reliable and trustworthy the issuer, the higher the chance that the investor will not get their money back.
Financial instruments are valued in different currencies. Because of this, changes in the currency exchange rate may affect the price of an internationally traded asset. If investors are holding any foreign assets, they’ll have to account for this.
3. Interest rate
When interest rates change, they often impact the value of certain financial instruments. This is especially relevant for securities like bonds, which are highly sensitive to fluctuations in interest rates.
4. Leverage effect
This refers to investors potentially losing more than their initial investment itself. Financial instruments like futures contracts or option premiums are particularly vulnerable to this.
In certain cases, investors may be unable to sell or trade a particular asset quickly and easily. This depends on the liquidity of the financial instruments they rely on, which can also evolve over time.
This is an umbrella term for any negative developments arising in the course of regular business activities. Anything from unforeseen legal issues, lack of access to skilled workforce, drop in demand, etc fall into this category
This describes the risk involved in the very nature of investing in the stock market. Investors rarely have access to perfect information, so there’s always the chance of them overlooking key details during market research. Speculative risk also arises from failing to account for other negative factors or relying too heavily on volatile investments.
This refers to a discrepancy between the “book” value of an asset and its true market value when it’s sold or traded. Investing in an asset that’s overvalued may result in a less favorable transfer price---or an outright loss---when it’s eventually sold.
Fluctuations in the value of a financial instrument or underlying market conditions may make assets less attractive. This volatility refers to changes in the price of an asset within a certain time frame, driven by external market conditions or other factors. It’s especially relevant for day traders who try to capitalize on these types of short-term market fluctuations.
Typically, most of the above factors will be in play at the same time. The interplay between the various sources of risk makes it challenging to account for them. That’s where risk management software comes in.
With so many variables at play, it’s impossible to keep track of these without some form of automation.
Enterprise risk management software for banks, brokers, and other financial institutions helps them make better decisions. It does this by providing insights about potential risks, generating reports, and even helping to forecast likely future scenarios.
Broadly speaking, risk analysis solutions assist with the following tasks:
Before you can address the risks you may be facing, you must first understand what they are. Financial risk management software can surface relevant market trends and indicators to facilitate this process. By helping with this initial risk identification, software solutions make it possible to quantify and manage potential future threats.
Once you’ve identified the risks, the next step is to measure the extent of their possible negative impact. Risk assessment software can assist by pulling together relevant financial figures and presenting them in a digestible format.
Advanced financial risk management tools can even simulate future outcomes. For instance, they can generate “what if” scenarios based on available inputs and ongoing developments.
With the risks mapped out and sorted by priority, the final step is to develop a way to minimize them.
This can take the form of proactively changing the makeup of your existing portfolio to counterbalance any negative outcomes. Alternatively, it may involve developing contingency plans that you can act on if your risk profile changes due to emerging market developments.
Financial risk analysis software supports this work with reliable data, actionable reporting dashboards, and predictive forecasting models.
There’s a wealth of available digital tools that help manage risk. They can assist investors with the following:
1. Data aggregation
With any type of threat assessment, the sheer volume of available data is a challenge in its own right. That’s why risk analytics software will usually be able to import, parse, and aggregate data from multiple sources, then store that data for future use.
This significantly speeds up and simplifies the task of pulling together relevant facts and figures.
Most risk management solutions can supply standard reports or allow users to create their own. Investors can then view these reports within a dashboard or download them in various formats (PDF, CSV, XLS, etc). This makes it easy to share them with other stakeholders or store them for future reference.
3. KRI Monitoring
Usually, institutions and investors will define their own set of key risk indicators (KRIs). These are similar to key performance indicators (KPIs): They aim to provide an at-a-glance picture of the current level of risk.
Risk management software can help keep an eye on these KRIs and visualize them in e.g. a dashboard. It’s even possible to set up live alerts that give an early warning of any negative KRI trends so that these can be tackled in a timely manner. By setting thresholds for acceptable KRI performance, you can delegate the work of monitoring these to your risk analysis tool.
As discussed, accounting for every source of risk is a massive task. Fortunately, risk management solutions can streamline this process. Such tools can apply artificial intelligence and algorithms to turn generic risk data into actionable insights that you’re able to act upon.
In addition, software can use advanced modeling to spot, analyze, and prioritize risk factors. This demystifies future threats, helping investors formulate plans for any eventuality.
Risk management tools can assist with both internal and external audits. For instance, such software can perform operational audits to see how good the organization is at both identifying and responding to new developments.
Additionally, these types of solutions can perform data audits. This focuses on the quality of the market data itself by looking at its historical performance to spot inconsistencies, unreliable signals, and so on.
6. Asset valuation
Certain financial instruments may be tricky to evaluate based on readily available prices and market data. In such cases, you can find portfolio risk management software that provides so-called “fair value pricing.” This relies on using e.g. mark-to-model pricing methods to provide independent valuations of assets that aren’t frequently traded.
By using these forms of pricing models, investors can ensure that the book value of their assets closely matches their true market price. This helps to reduce the valuation risk discussed above.
7. Compliance management
Failing to account for risk isn’t just bad for your bottom line. You may also find yourself in breach of laws and regulations that govern the extent of permitted risk exposure. Risk assessment solutions help prevent this by discovering whether you’re compliant with local or international guidelines.
There’s no shortage of popular risk management software for banks and other investors. So which of the many solutions should you go for? The answer will often depend on your needs and priorities.
When comparing financial risk assessment software, consider these factors:
First, prepare a list of must-have features for your business. Then you can compare these against the range of features provided by the risk analysis software you’re evaluating.
By doing this, you’ll ensure that:
2. Ease of use
Financial risk management is complex enough as it is. So think about whether the risk analysis tool you’re buying is user-friendly.
Remember: You and your staff will likely be using it on a regular basis. Make sure that the solution you pick is intuitive and easy to use. This will help you avoid wasted effort and prevent costly errors down the line.
Your risk analysis solution won’t exist in a vacuum. It’ll have to plug into your existing IT infrastructure and communicate with your other business tools. Consider how seamlessly your chosen software can integrate into your operations.
4. IT resources
Someone will have to maintain and manage the software going forward. Many analysis solutions are maintained by the vendors, use third-party server hardware, and are available entirely in the cloud. Other software may require a degree of involvement and hardware support from your internal IT department.
Make sure to find the right balance of features and maintenance costs.
5. Level of support
Consider what kind of assistance you can expect in implementing and using your chosen software. If you have internal IT resources and expert users, this may not be as relevant.
But if your organization is likely to need a significant level of help in the starting phases, it’s best to go for solutions that provide personal support. What is their email response time? Is it possible to get in touch via phone to resolve issues in real-time?
6. Customer reviews
Don’t overlook the importance of getting the opinions of existing customers. The best software will have a lot of user reviews with a high proportion of these being positive. But in addition to looking at the top-level rating, take the time to read some of the detailed reviews themselves. This will often make it clear what business areas the software excels at and what is lacking.
Trusted software review sites like Capterra, Gartner, Software Advice, etc. make this type of comparison shopping easy.
7. Cost considerations
This may seem obvious, but it’s often difficult to get a good sense of the price vs. benefits of a given tool.
The most expensive solutions may not be the best for your particular needs. A better approach is to look at the value for money: Does the software in question deliver the right mix of your high-priority features at a competitive price?
Another consideration is the pricing model itself. Is there a monthly or yearly licensing fee? Does the software offer the option to buy individual modules or upgrades? What is the binding period, if any?
In the end, it comes down to return on investment. If the risk analysis software lets you effectively spot and manage any emerging threats, it may well end up paying for itself.
TTMzero: Automated solutions for capital markets
One of United Fintech's portfolio companies, TTMzero, assists financial players with pre and post-trade digitization to maximize capital efficiency and mitigate operational risk. TTMzero's goal is to improve quality and increase satisfaction among their customers, which include some of the world's leading investment banks and asset managers.
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Key Figures and Risk Indicators
TTMzero calculates about 100 key figures for structured products, including the Greeks and risk indicators, which provide precise risk and return probabilities.