Event Risk

AAA

DEFINITION of 'Event Risk'

1. The possibility that an unforeseen event will negatively affect a company or industry. Unforeseen corporate reorganizations or bond buybacks may have positive or negative impacts upon the market price of a stock.

2. The risk associated with a changing portfolio value due to large swings in market prices. Also referred to as "jump risk" or "fat-tails." These are extreme portfolio risks due to substantial changes in market price.

3. The possibility that a bond issuer will miss a coupon payment to bondholders because of a dramatic and unexpected event. Credit rating agencies may downgrade the issuer’s credit rating as a result, and the company will have to pay investors more for the higher risk of holding its debt.

INVESTOPEDIA EXPLAINS 'Event Risk'

Companies can easily insure against some types of event risk, such as fire, but other events, such as terrorist attacks, may be impossible to insure against because insurers don’t offer policies that cover such unforeseeable and potentially devastating events. In some cases, companies can protect themselves against risks through financial products such as act of God bonds, swaps, options and collateralized debt obligations.

Another type of event risk is the possibility of a corporate takeover or restructuring such as a merger, acquisition or leveraged buyout. These events can require a firm to take on new or additional debt, possibly at higher interest rates, which it may have trouble repaying. Companies also face regulatory risk, in that a new law could require a company to make substantial and costly changes in its business model. For example, if the president signed a law making the sale of cigarettes illegal, a company whose business was the sale of cigarettes would suddenly find itself out of business.

Companies also face event risk from the possibility that the CEO could die suddenly, a key product could be recalled, the company could come under investigation for suspected wrongdoing, the price of a key input could suddenly increase substantially or countless other sources.

RELATED TERMS
  1. Bond

    A debt investment in which an investor loans money to an entity ...
  2. House Money Effect

    The tendency for investors to take more and greater risks when ...
  3. Risk Control

    The method by which firms evaluate potential losses and take ...
  4. Business Continuity Planning - ...

    The creation of a strategy through the recognition of threats ...
  5. Risk Assessment

    The process of determining the likelihood that a specified negative ...
  6. Recapitalization

    Restructuring a company's debt and equity mixture, most often ...
RELATED FAQS
  1. What is the difference between payment netting and close-out netting?

    Both payment netting and close-out netting are methods of settlement between two or more parties, used to reduce risk exposure. ... Read Full Answer >>
  2. What is the minimum capital adequacy ratio that must be attained under Basel III?

    Under Basel III, the minimum capital adequacy ratio that banks must maintain is 8%. The capital adequacy ratio measures a ... Read Full Answer >>
  3. How is portfolio variance reduced in Modern Portfolio Theory?

    According to modern portfolio theory, or MPT, portfolio variance can be reduced by diversifying a portfolio through the inclusion ... Read Full Answer >>
  4. What industries typically use delta hedging techniques?

    Those industries which are connected to the finance and commodity markets and are trading derivatives are the most likely ... Read Full Answer >>
  5. What are examples of inherent risk?

    Inherent risk is the risk imposed by complex transactions that require significant estimation in assessing the impact on ... Read Full Answer >>
  6. How does Basel III strengthen regulation and improve risk management of the global ...

    Basel III was a comprehensive set of regulations adopted in the wake of the 2008 financial crisis, designed to help protect ... Read Full Answer >>
Related Articles
  1. Options & Futures

    6 Asset Allocation Strategies That Work

    Your portfolio's asset mix is a key factor in whether it's profitable. Find out how to get this delicate balance right.
  2. Active Trading Fundamentals

    How To Convert Value At Risk To Different Time Periods

    Volatility is not the only way to measure risk. Learn about the "new science of risk management".
  3. Options & Futures

    An Introduction To Value at Risk (VAR)

    Volatility is not the only way to measure risk. Learn about the "new science of risk management".
  4. Options & Futures

    Financial Concepts

    Diversification? Optimal portfolio theory? Read this tutorial and these and other financial concepts will be made clear.
  5. Investing

    Prospering In The Next Bear Market: Here's How

    Prepare to survive, and even prosper, in the impending bear market, by considering and putting into action the following four strategies.
  6. Professionals

    When Couples Have Different Risk Appetites

    Communication, compromise and frequent monitoring will lead to successful investing for spouses with different risk tolerances.
  7. Entrepreneurship

    Fed Raising Rates Affects Startup Funding

    With interest rates having nowhere else to go but up, the Fed’s impending interest rate raise will likely begin to reverse the flow of startup funding.
  8. Entrepreneurship

    MLPs: Is Now the Right Time to Invest?

    Here's what you need to know about MLPs, those under-the-radar investment vehicles.
  9. Professionals

    Indexing vs. Stock Picking: Which is Better Now?

    Indexing and stock picking both have positive and negative features. One has outperformed the other historically, but which is the better option right now?
  10. Economics

    Understanding Limited Liability

    Limited liability is a legal concept that protects equity owners from personal losses due to their ownership interest in the company.

You May Also Like

Hot Definitions
  1. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  2. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  3. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  4. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  5. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  6. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!