Page 144 - PRIAA Glossary
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RHO
The rate of change in the price of an option with respect to the change in the risk-free interest rate, keeping all other factors constant.
free interest rate:
The equation below illustrates the mathematical formulation for rho, where V is the value of the option and r is the risk-
∂V ρ = ∂r
RIGHT-WAY RISK
A phenomenon whereby the present value of a swap (or portfolio of swaps) traded with a counterparty is correlated with the increasing creditworthiness of the counterparty.
RISK APPETITE
The level of risk that an organisation is prepared to accept before action is deemed necessary to reduce it.
RISK CAPITAL
Extra funds that are used for high-risk, high-reward investments. It is the money one can afford to lose in return for potential high returns.
RISK CONTROL SELF-ASSESSMENT (RCSA)
A framework used to analyse the firm’s operational risk profile. An RCSA provides a means to identify control gaps that threaten the achievement of defined business or process objectives and monitoring what management is actually doing to close these gaps.
RISK REVERSAL
A trading strategy whereby a party buys an out-of-the- money put option and offsets the put premium by selling an out-of-the-money call option. Alternatively, a party can buy an out-of-the-money call option and offset the call premium by selling an out-of-the-money put option.
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