C R E D I T R I S K A N D M A R K E T R I S K

Research andAnalysis:

ALEXANDERCHRISTODOULAKIS

Research and AnalysisThe ever-changing climate of our global economy has

forced lending institutions, investment firms, and

corporations to adjust, advance, and "bulletproof" their

practices.

In recent years, we have seen a number of instances of

economic turmoil and bankruptcy creating a greater

need for better risk management assessment tools and

risk management techniques.

Despite the increased use of

mitigation techniques, research and

analysis tools are crucial and equally

important when managing risk as

research and analysis functions as the

first protection layer for investors and

financial institutions against

excessive risk.

When a well-established analysis and

research force exists in a financial

institution procedures and scientific

techniques will be properly evaluated

and will , in turn, support the risk

management units of the institution.

Financial RisksFinancial risks can generally be broken down into several categories:

Market Credit LiquidityOperational Legal Regulatory Human factorModel

For the purpose of this slideshow, we will only be focusing on the first2: market and credit risk, in order to understand why research and

analysis are so crucial

Market RiskThe risk that changes in financial market prices

and rates. Market risk assessment is needed so

that decision makers and risk managers have the

most up to date information to make decisions.

Market risk can be broken down further into equity

market, interest rate, foreign exchange, and

commodity risk.

The future of rates and asset prices cannot always

be predicted through research and analysis, but it

can provide excellent insight for proper instrument

selection when it comes to hedging an exposure.

Credit RiskThe risk that a change in the credit quality of a counterparty

will affect the value of a lender's position. Investors are

exposed to the risk that the counterparty may be

downgraded by a rating system.

The credit evaluation process is essential when analyzing

the business risks, financial risks, capital structure analysis,

and adequate sources of repayment for the protection of

the borrower.

Credit Evaluation ProcessTraditionally, the credit evaluation process takes into

account a variety of different sources to assess the

risk for the lender. It includes the rigorously analyzing

of balance sheets and income statements and an

extensive due dil igence process. Although credit

scoring methodologies are also heavily applied in the

assessment of credit risk of prospective borrowers,

these methodologies rely on the use of operational

research, statistical and data mining models and are

usually being provided by external vendors

Even though the existence of a trend of relaxing lendingstandards due to the increased use of risk transferring

techniques, the research and analysis function along withthe assessment of the overall financial, economic and

political environment where a firm operates, should remainat the core of every sustainable investment and credit

decision making.

ALEXANDERCHRISTODOULAKIS