Risk Transformation

Risk transformation is the process of converting or altering the nature of risk, typically by transferring it to another party or by using financial instruments to modify risk exposure. This can include practices like securitization, where loans or other financial assets are packaged and sold as securities, effectively transferring credit risk to investors. Risk transformation allows businesses or investors to mitigate or manage risks by passing them on to other entities or by restructuring their exposure to different risk profiles.

Example

A bank engages in securitization by bundling mortgage loans into mortgage-backed securities (MBS), transforming and transferring the credit risk to investors.