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. House Money Effect

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

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

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

    The process of determining the likelihood that a specified negative ...
  5. Portfolio

    A grouping of financial assets such as stocks, bonds and cash ...
  6. Recapitalization

    Restructuring a company's debt and equity mixture, most often ...
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. Professionals

    How do companies measure labor supply in human resources planning?

    Find out how and why a company's human resources department would measure labor supply, and what policies would address a shortage or surplus.
  6. Trading Strategies

    The 10 Worst Mistakes Beginner Traders Make

    Traders generally buy and sell securities more frequently and hold positions for much shorter periods than investors, which can result in costly mistakes.
  7. Fundamental Analysis

    Why are OTC (over-the-counter) transactions controversial?

    Learn more about over-the-counter transactions, and why OTC traders are considered riskier than traders working with larger market exchanges.
  8. Options & Futures

    What is the difference between arbitrage and hedging?

    Dive into two very important financial concepts: arbitrage and hedging. See how each of these strategies can play a role for savvy investors.
  9. Fundamental Analysis

    What is the difference between cost of equity and cost of capital?

    Read about some of the differences between a company's cost of equity and its cost of capital, two measures of its required returns on raised capital.
  10. Fundamental Analysis

    What is arbitrage pricing theory?

    Find out what arbitrage pricing theory is and how it can theoretically be used by investors to generate risk-free profit opportunities.

You May Also Like

Hot Definitions
  1. Command Economy

    A system where the government, rather than the free market, determines what goods should be produced, how much should be ...
  2. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  3. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  4. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  5. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  6. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
Trading Center