In the context of financial modelling, event risk is the potential for an unforeseen event to occur that could have a significant impact on a company's financial position. This could include things like natural disasters, regulatory changes, or even a major security breach. Event risk can be difficult to predict and can often have a major impact on a company's financial stability, so it is important for financial modellers to account for it in their models.
Event risk is the risk that an event will occur that has a material impact on the value of the financial instrument. The most common way to calculate event risk is to use a Monte Carlo simulation. In a Monte Carlo simulation, a large number of randomly generated scenarios is run to estimate the probability that a particular event will occur. This probability can then be used to calculate the expected value of the financial instrument.
An example of an event risk is a natural disaster, such as a hurricane or tornado. These events can cause a company to lose money if they are not properly prepared for them. Event risks can also include things like strikes or other work stoppages.