The risk of loss because contracts cannot be enforced, or from lawsuits and changes in law. Netting depends on its enforceability.
Where you will meet it
Legal risk comes up in 9 learning outcome notes across the FRM syllabus.
A few of them:
Banks FRM Part I · Financial markets and products
“Operational risk is loss from inadequate or failed processes, people and systems, or from external events, and includes fraud and legal risk.”
The Building Blocks of Risk Management FRM Part I · Foundations of risk management
“Under Basel it includes legal risk but excludes strategic and reputational risk.”
Country Risk: Determinants, Measures, and Implications FRM Part I · Valuation and risk models
“Legal risk is not what the statute book says but whether contracts and property rights are actually enforced by an independent, predictable judiciary.”
Country Risk: Determinants, Measures, and Implications FRM Part II · Credit risk measurement and management
“Third, legal risk is how well courts enforce contracts and protect property rights, and it is separate from political stability.”
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