I've worked within a risk team in several investment banks. What exactly is risk? In this case risk is usually the possibility of monetary loss. Risk is not bad - investment is about balancing risk Vs reward. Not knowing your risk is bad though.
Market risk comes from the environment in which a bank operates. Obvious risks include interest and exchange rates, inflation, less obvious risks include political uncertainty and natural or man-made disasters. It can not be controlled but can sometimes be hedged against.
Credit risk is the possibility that a person or organisation might not pay money when it is due.
- PnL - Profit and Loss. The profit or loss of an investment over a given time frame.
- VaR - Value at Risk. Measures the probablity and value of loss due to market risk for a given time frame. Usually applied broadly to portfolios and above.
- PFE - Potential Future Exposure. Measures the probablity and value of loss due to credit risk for a given time frame. Usually calculated at the trade or position level.
- Sensitivity - a measure of the expected degree of change in value of an asset in response to an external factor.