Latest news
May, 30 2010
Version 4.00 of the finance ontology is published.
Until financing of the ontology development is provided, no more updates are planned.
External risks
The risks not directly linked to the handling of financial instruments: the legal and fiscal compliance context, the transactions and corporate actions.
The handling in the ontology is described in the class Thing/Finance/Risks/ExternalRisks.
Risk profiles - General
The core information is formed by the risk profile.
The risk profile is the representation on the X-axis of the probability of the risk occurring, on the Y-axis the impact of the risk occurring.
This is evaluated per risk group. E.g. customer risk, economic area risk, exchange rate risk,...
Several evaluation subjects together form a risk profile for the financial instrument which is balanced against a risk tolerance level.
The evaluation per financial or per issuer of financial instruments is possible via DL- and S(Q)WRL.
Another option would be to link directly the profile with issuers/financial instruments.
This is not my preference, since the exploitation of the logics is much more flexible and allows the full benefit usage of ontology techniques.
Practical usages of risk profiles are:
- usage of the profile as a securities selection criterion,
- determination of the price of a security: medium risk profile might e.g. represent an expected return of LIBOR 1 year X 2. The price of the security will fall until the required return including the risk premium is reached
- risk monitoring
Risk profile - more specifications
The risk profile class is the core of the risk monitoring.
The taxonomy of the risk profiles class consists of 1 level of subclasses.
That level is represented by different risk subclasses: commodity cost, customer risk, energy cost, exhange rate,...
All profiles are stored at the level of the subclass.
Each risk profile can have 3 possible impact evaluations:
1. Impact on the profitability position of the issuer of the stock.
2. Impact on the solvability position of the issuer of the stock.
3. Straight or indirect decrease of the stock price.
That impact evaluation can be an individual of the subclasses of the impact class: High, Medium or Low.
Example: LowProfitabilityImpact.
If we represent the impact evaluation on the Y-axis, we divide the Y-axis into 3 parts.
The part starting at the intersection represents a low impact, the second part a medium impact and the upper part a high impact.
On the X-axis we evaluate the probability of the risk occurring.
The evaluation is done on both axis in 3 categories: low, medium and high.
The low probability is represented on the 1/3 part starting at the intersection, the medium probability in the second part and the higher probabilities in the third part of the X-axis.
Each individual profile of the subclasses refers to:
1. an impact subject and assessment of the impact
2. a probability assessment
Further necessary information provided by the RiskProfile class:
1. the area impacted by the risk: where is the source of the risk
2. the symptom which leads to a risk assessment
3. the source for the symptom: a press release, annual accounts statement, internet article,...
4. the validity period for the profile
Example for the commodity cost risk profile
The assumption is, the needed commodity will always be available but the price can reach sky high.
The price increase is proportional to the scarceness.
That way the valuation and related impact measurement is facilitated.
Possible risk occurrences:
- Producer area
If the commodity costs increase, the costs of production are increasing, then:
-- less sales by the producer
-- less profit by the issuer in the short term
-- less solvability by the issuer in the long term
- Issuer area
If the commodity costs decrease, the costs of collaterals increase and the underlying assets of derivatives become less worth, then:
-- less profit by the issuer in the short term
-- less solvability by the issuer in the long term
- Holder area
If the commodity costs decrease, the underlying values become less worth, then:
-- prices, thus valuation is lowered
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