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Foundations o f Risk Management Liquidity risk is subdivided into two parts: (1) funding liquidity risk and (2) trading liquidity risk. Funding liquidity risk occurs when an entity is unable to pay down or refinance its debt, satisfy any cash obligations to counterparties, or fund any capital withdrawals. Trading liquidity risk occurs when an entity is unable to buy or sell a security at the market price due to a temporary inability to find a counterparty to transact on the other side of the trade. Operational risk considers a wide range of non-financial problems such as inadequate computer systems, insufficient internal controls, incompetent management, fraud, human error, and natural disasters. Legal risk could arise when one party sues the other party in an attempt to nullify or terminate the transaction. Regulatory risk could arise from changes in laws and regulations that are unfavorable to the entity (e.g., higher tax rates, higher compliance costs). Business risk revolves around uncertainty regarding the entity’s income statement. Revenues may be uncertain because of the uncertainty surrounding the demand for the products and/or the price that should be set. Production and administration costs may also be uncertain. Strategic risk can be thought of in the context of large new business investments, which carry a high degree of uncertainty as to ultimate success and profitability. Alternatively, it could be thought of from the perspective of an entity changing its business strategy compared to its competitors. Reputation risk consists of two parts: (1) the general perceived trustworthiness of an entity (i.e., that the entity is able and willing to meet its obligations to its creditors and counterparties) and (2) the general perception that the entity engages in fair dealing and conducts business in an ethical manner.