The market risks that arise from changing currency or share prices are considered first-order risks. These are essentially directional risks, i.e. the risks come from asset prices going up or down. For example, if interest rates rise and the yield curve responds uniformly, then a parallel shift in the yield curve has occurred. That is outright or absolute interest rate risk. But this does not always happen. Sometimes the short-end of the yield curve responds to an interest rate hike but not the long end or vice versa. Sometimes both respond in totally opposite ways or various parts of the curve respond in different degrees. This aspect of interest rate risk is known as curve risk. Another facet of interest rate risk is the spread between swaps and government bonds, and between government bonds and London Interbank Offered Rate (Libor). Because the spread between them changes, there is spread risk. Curve and spread risks are considered second-order market risks as are gamma (option curvature) and volatility risks. Senior managers must be kept informed of the firm’s exposure not only to first-order interest rate risk (i.e. absolute or outright) but also to second-order risks of curve and spread in order to spot the firm’s weak points within the general category of interest rate risk. So studying a summary VAR number for interest rate risk does not give enough detailed information for senior management to take corrective action. Firms with a large option book must also report to senior managers their gamma and volatility risks, and these should also be subject to limits. Put bluntly, gamma indicates how quickly an option becomes unhedged when the underlying price changes. Its technical definition is the rate of change in the delta of an option for one unit price move of the underlying asset. Delta itself is a measure of the rate of change in the option’s price for a given move in the price of the underlying. Thus, delta is a first-order risk measure while gamma is a second-order risk measure. Volatility measures the price fluctuation of an asset and is an important variable in the pricing of an option.