Several fundamental market risks impact the value of assets or a portfolio. Although these risks are most often cited with respect to derivatives, most apply to nonderivatives exposures as well:

• Absolute risk (also known as delta risk) arises from exposure to changes in the price of the underlying asset or index.

• Convexity risk (also known as gamma risk) arises from exposure to the rate of change in the delta or duration of the underlying asset.

• Volatility risk (also known as vega risk) arises from exposure to changes in the implied volatility of the underlying security or asset.

• Time decay risk (also known as theta risk) arises from exposure to the passage of time.

• Basis risk (also known as correlation risk) arises from exposure to the extent of correlation of a hedge to the underlying assets or securities.

• Discount rate risk (also known as rho risk) arises from exposure to changes in interest rates used to discount future cash flows.