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40 Risk Management: An Introduction (Risk management framework…
40 Risk Management: An Introduction
Definition
Risk
Risk exposure
Risk management
define the level of risk to be taken
measures the level of risk being taken
adjusts the latter toward the former
with the goal of maximizing the company's or portfolio's value or the individual's overall satisfaction
Risk management framework
Establishing processes and policies for
risk governance
Determining the organization's
risk tolerance
Identifying and measuring
existing risks
Managing and mitigating risks
to achieve the optimal bundle of risks
Monitoring
risk exposures over time
Communicating
across the organization
Performing
strategic risk analysis
Risk budgeting
any means of allocating investments or assets by their risk characteristics
The
goal
is to allocate the overall amount of acceptable risk to the mix of assets or investments hat have the
greatest expected returns
over time.
financial and non-financial source of risk
Financial risks
Market risk
Credit risk
Liquidity risk
Non-financial risks
Operational risk
Solvency risk
Regulatory risk
Governmental or political risk
Legal risk
Model risk
Tail risk
Accounting risk
Interaction between risks
Risks are not necessarily independent because many risks arise as a result of other risk; r
isk interactions can be extremely non-linear and harmful.
Risk metrics
standard deviation or volatility
asset-specific measures
beta
duration
derivative measures
delta
gamma
vega
rho
tail measures
Value at Risk
Conditional VaR
Subjective and market-based estimated of risk
Stress testing
Scenario analysis
Method of risk modification
Risk prevention and avoidance
Risk acceptance
Risk transfer (insurance)
Risk shifting (derivatives)