The concept of risk

Generally speaking, risk is the possibility of failing to achieve the expected financial results from investments and (or) complete or partial loss of investment capital (in particular cases, losses may exceed the amount of invested capital or additional investments may be required). Risks are caused by various reasons and they are related to the type and structure of financial instruments. Due to the variety of market situations it is impossible to anticipate all risks at any time, therefore this list should not be regarded as complete or final. In any case, the investor has to get acquainted with the information presented below and pay thorough attention to risks that are related to investments in financial instruments.

Understanding the risks

We would like to draw your attention to risks that may occur while executing financial transactions in the securities market by applying brokerage services and services of asset management. The description of risks is applicable to all client categories — retail clients, professional clients, and eligible counterparties.

The customer testifies that he/she understands and undertakes all potential risks, including, but not limited to the below-mentioned main types of risks:

Credit risk

The risk of losses that may occur in cases when the contractual parties or issuers are unable or refuse to execute their liabilities in accordance with provisions of the contract.

Credit risk can be subdivided as follows:

  • Issuer’s default risk — the risk is related to possible decrease of value of financial instruments or its complete loss due to the issuer’s failure to fulfil its liabilities, poor financial performance etc.
  • Sector risk — the risk is related to unfavourable circumstances or functioning conditions of a particular sector that directly affect activities of the involved companies and thus negatively impact the prices of issued securities.

Market risk

The risk of losses that may occur in relation to revaluation of financial instruments as a result of changes in the market prices. The market price may change if currency rates, interest rates and other factors change.

Market risk can be subdivided as follows:

  • Interest rate risk — the risk that losses may occur due to unfavourable changes in interest rates.
  • Currency risk — the risk that losses may occur due to unfavourable changes in currency rates.
  • Price risk — the risk that losses may occur due to unfavourable changes in the market price of financial instruments.

Country risk (political and economical)

The risk of losses that occurs in case events in a country or a region have a negative impact on the political and/or economical situation in the country that directly influence activities of the companies operating in the relevant country.

Legislation risk (including taxation)

The risk of losses that is related to amendments in the country’s existing legislation or that occurs as a result of adoption of new legal enactments that may cause additional costs or decrease the profitability of investments.

Operational risk

The risk that losses may occur due to incompatible or incomplete internal processes, human or system errors or external circumstances, such as fraud, terrorism, acts of God, interruptions of information, electrical or other systems.

Financial market liquidity risk

The risk is related to the impossibility to close financial instruments’ positions that have been opened earlier in due time and without losses.

Strategic risk

The risk that the company may incur losses due to erroneous investment decisions.

Description of the risks associated with investments in certain financial instruments

Name Brief description of the financial instrument (FI) Major risks of the particular FI

Bonds / Debt securities

Bonds (debt securities) are securities that attest the right of the owner to receive the issuer’s debt equal to the bond’s nominal value and also fixed interest. The issuer publishes maturity term, interest rates, backing provided and other essential conditions in the issue prospectus or agrees them with the buyer individually.

The risk of losses due to the issuer’s inability to make mandatory interest payments and to pay face value of the bonds at maturity (credit risk). There is the risk of difficulty or impossibility to sell the bond at desired time and desired price (liquidity risk). The bond price is affected by market conditions, e.g., interest rates (market risk). As interest rates increase at the market, the market price of bonds having fixed interest rate decreases. Whereas in case of declining market interest rates the bond price will grow. The price of the bonds with fixed interest rate that have lower coupon and longer maturity is more variable than the price of the bonds having higher coupon and shorter maturity. Therefore, if the bonds are sold before maturity, the bondholder can lose some of the made investment.

The risk of premature redemption of the bonds can be also possible in accordance with the issue conditions.

Risk associated with investments in subordinated bonds, arises in case of the issuer's insolvency. Сlaims of the holders of subordinated bonds are satisfied after the claims of all other creditors of the issuer, but before satisfying the claims of the shareholders. Thus, the holders of subordinated bonds are less protected against unfavourable consequences of the issuer's insolvency than holders of straight bonds


Stocks are securities that attest the right of the owner to the company’s capital shares and the receipt of dividends or profit.

The issuer defines the specific parameters of the issue and the type of stocks (common, preferred, voting, non-voting etc.).

Stock prices are markedly volatile. Therefore, there is the risk of incurring losses because of declining stock market prices (price risk). The reasons for the price decrease can be also related to unfavourable conditions in a particular sector (sector risk). There is the risk of difficulty or impossibility to sell the stock at desired time and desired price (liquidity risk). There is the risk of complete loss of the investment, which is associated with the issuer’s insolvency/bankruptcy (risk of the issuer’s default on obligations).

Investment certificates of mutual funds

Investment certificates are securities that attest the investor’s share in the mutual fund. The objective, investment policy, risk profile, fund management expenses, and other information about particular fund is provided in the fund prospectus.

The risk of the mutual fund depends on the FI that the fund purchases and the investment policy that is outlined in the fund’s prospectus. Money market and bond funds are safer ones (lower volatility of the mutual fund share value), whereas balanced and equity funds have higher risk (higher volatility of the mutual fund share value), which also enables higher return.

Exchange-traded funds (ETF)

Exchange-traded funds are securities that are traded on stock exchanges, and their investment portfolio structure is similar to the structure of an index. The structure of some exchange-traded funds envisages the possibility of margin trading or short positions of FI. The investor’s duty is to carefully examine all conditions, rights and obligations in respect of each particular exchange traded fund.

Prices of exchange-traded funds depend on the price of their underlying asset, and it can vary considerably, thus meaning both potential profit opportunities and increased risk of losses.

There is the risk that amount of trading in the exchange-traded funds at stock exchanges will be not sufficient for the investor to be able to perform transactions in the fund shares at desired time and desired price. In particular situations (e.g., rapid market changes), there is the risk of deviation of the exchange-traded fund price from the fund’s net asset value, and the investor will be unable to get back the invested amount consequently.

Structured financial products (FP) or structured financial instruments (FI)

Structured financial instruments include FP the profitability of which usually depends on certain events or is linked to certain processes.

Normally, this common term is used for such kind of FP, however, one should remember that this term is not unified and it combines different variants of complex, combined and structured securities. The investor’s duty is to carefully examine all conditions, rights and obligations in respect of each particular FP.
Where conditions provide for the principal, interest or dividends payments to depend on certain events (or the development of processes) in the future (the index values or movements, the value of certain FI or FI portfolios, the price of goods, raw materials, interest rates values etc.), the issuer’s obligations in respect of these payments may be reduced or cancelled.

Taking into account the above-mentioned, structured FP may be affected by both major types of risks pertaining to FI and specific risks, such as non-existence of creditor’s rights etc.

As the price of structured FP often is not set on the market, but is calculated, price risk may be considerable. The same refers to liquidity risk — it can be difficult or even impossible to sell structured FP at desired time and desired price.


Options are financial instruments that convey the holder’s right to buy or sell a certain amount of financial instruments (underlying assets) at a certain price at a certain date or earlier.

The call option is the right (but not the obligation) to buy (or sell) FI, while the put option is the obligation to sell (or buy) the underlying asset.

The premium for entering into the agreement is paid by the buyer to the issuer.

The existing risks are associated with the risks of underlying assets (primarily — price risk, interest rate risk, etc.). The risks of the buyer and seller of the option are different: the buyer is entitled to use the opportunity (the loss limit is equal to the initial premium), whereas the seller has the obligation to sell (or buy) the underlying asset at the price determined at the moment of entering into the agreement. If the options are traded at organized market, those do not entail counterparty risk. However, if options are purchased over the counter, the buyer assumes the counterparty risk (if the seller defaults on its obligations).
The price of an option depends on the following: ratio between the underlying asset price and strike price, option term, interest rate level, etc.

After the expiration date, the non-executed options become null and void and lose their value respectively. FI that serve as security for options can be written off without a prior notice. In some cases, when uncovered options are sold, losses can be unlimited.


Futures contracts are fixed-term standardized contracts to buy or sell certain amount of particular underlying assets at a certain price at a certain date in the future. Prices of such FI primarily depend on the price of the underlying asset.

The existing risks are associated with the risks of underlying asset (e.g., stocks, bonds, indexes, interest rates, currencies, raw materials, emission quotas, etc.).

The risk or margin call situation occurrence and the possibility of additional deposit requested from the investor. There is the risk to fully or partially lose the security deposit of the futures contract in case of unfavourable market value changes. The risk of forced closure of the position.

Other risks

Performing transactions with FIs using trading platform differs from FI transactions using other trading systems. Use of trading platform involves operations risks, including risk of losses due to electric of information system failure, risk of third party unauthorized access to trading platform, etc.

Opening an FI short position, the customer should be aware that possible losses can be several times higher than initial investment and their amount can be unlimited.

Detailed information on risks involved in derivatives trading and use of trading platform can be found in sections B3.6, B4.4, A5 of the General Business Terms and Conditions of the brokerage joint stock company ABLV Capital Markets.

Further information about brokerage services is available from ABLV Capital Markets specialists:
Tel: +371 6700 2777
Fax: +371 6700 2770
E-mail: ibas@ablv.com