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. Bond

    A debt investment in which an investor loans money to an entity ...
  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. 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".
  3. 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".
  4. Options & Futures

    Financial Concepts

    Diversification? Optimal portfolio theory? Read this tutorial and these and other financial concepts will be made clear.
  5. Mutual Funds & ETFs

    What types of fees are incurred by purchasing ETFs?

    Understand all the various costs, both explicit and hidden, involved in trading exchange-traded funds, or ETFs, and see how their costs compare to fund trading costs.
  6. Options & Futures

    What is spread hedging?

    Learn about one of the most common risk-management strategies options traders use, called spread hedging, to limit exposure to harmful stock movements.
  7. Mutual Funds & ETFs

    What ETFs can I buy that track the telecommunication sector?

    Get information about some of the most popular and highly traded ETFs that investors use to track the telecommunications market sector.
  8. Mutual Funds & ETFs

    Should I invest in ETFs or index funds?

    Learn advantages to investing in exchange-traded funds, or ETFs, and index funds, and decide whether to include them in your investment portfolio.
  9. Investing Basics

    What does the end of the quarter mean for portfolio management?

    Take a deeper look at why the end of a financial quarter, and all of its accompanying reports, is a significant event for portfolio management.
  10. Trading Strategies

    Is using the Donchian channel more risky or more conservative than using Bollinger Bands®?

    Read about differences between Bollinger Bands and Donchian Channels, and learn why the latter are considered to be a riskier trading tool.

You May Also Like

Hot Definitions
  1. Trust Fund

    A trust fund is a fund comprised of a variety of assets intended to provide benefits to an individual or organization. The ...
  2. Christmas Tree

    An options trading strategy that is generally achieved by purchasing one call option and selling two other call options at ...
  3. Christmas Club

    A short-term savings account that usually pays out the full account balance to its account holders once each year, right ...
  4. Boston Snow Indicator

    A market theory that states that a white Christmas in Boston will result in rising stock prices for the following year. For ...
  5. Christmas Island Dollar

    The former currency of Christmas Island, an Australian island in the Indian Ocean that was discovered on December 25, 1643. ...
  6. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
Trading Center