Volatility Risk

Overview

Price movement can change collateral coverage, settlement value, treasury capacity, customer quotes, fees, liquidation risk, and accounting results. Exposure depends on position size, direction, holding period, liquidity, leverage, correlations, and the timing between pricing, authorization, conversion, and settlement.

Historical volatility may not capture jumps, depegging, market closures, fragmented venues, or disappearing liquidity. Hedging instruments can introduce basis, counterparty, margin, rollover, and operational risks, while automated liquidations may amplify losses during stressed markets.

Organizations should measure positions and sensitivities, define limits, shorten exposed settlement windows, maintain collateral and liquidity buffers, and test severe scenarios. Pricing rules, customer disclosures, hedge governance, liquidation controls, and contingency execution should remain effective when markets are disorderly.

Volatility risk is exposure to financial or operational harm caused by the speed, magnitude, or unpredictability of changes in an asset’s value. Volatility risk depends on exposure, liquidity, leverage, timing, and market stress, requiring limits and scenarios beyond ordinary historical price movement.

For Volatility Risk, the assessment should evaluate exposure to financial or operational harm caused by the speed, magnitude, or unpredictability of changes in an asset’s value. The assessment record should separate observed evidence supporting exposure to financial or operational harm caused by the speed, magnitude, or unpredictability of changes in an asset’s value from assumptions, state the time horizon and existing controls, and identify who owns any remaining exposure. Monitoring should test whether the conditions described in exposure to financial or operational harm caused by the speed, magnitude, or unpredictability of changes in an asset’s value have changed enough to require a new rating, treatment, or approval.