Price Risk

Definition

Price Risk (also profit margin risk) is the risk that product origination or service provision will occur at price or profit margin levels that materially deviate from the planned / expected amount due to external or internal factors. The margin metric may be referencing spread income, fees or any other markup that captures business profits.

Price risk is one of the core components of Revenue Risk, another being Volume Risk

Not to be confused with Market Risk where the price of a security or other assets is determined in a traded market environment

Causes

Price risk can be due to both internal and external factors.

• Internal factors include the ability of the business line to execute the business plan (human capital, infrastructure) to command a certain fee or margin level
• External factors comprise primarily of the competitive landscape which may compress the profitability of a given product of service

Issues and Challenges

Formal modelling of business risk (and its components such as price risk) is in a rather nascent stage. It is not one of the recognized regulatory risk types that attract capital requirements.

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