Reading 41: Risk Management - Introduction (Risk management framework…
Reading 41: Risk Management - Introduction
The end result is a risk profile that match the organization's risk tolerance and includes the risks that top management has determined match the organization goal
Organization may use multiple methods of risk modification after considering the cost and benefit of the various methods.
Risk Exposure Modification
Organization may bear a risk (self-insurance), avoid or take steps to prevent a risk, efficiently manage a risk through diversification, transfer a risk with insurance or a surety bond, or shift a risk (change the distribution of uncertain outcomes) with derivatives
Measures of Risk Exposure
Some risks must be valued subjectively
Tail risk is measured with Value at Risk (VaR) or conditional VaR
Derivative risk measures include delta, gamma, vega and rho.
Risk of assets is measure by standard deviation, beta, or duration.
Sources of risk
Interaction among risks are frequent and can be especially significant during period of stress in financial market.
risks from the operation of the organization and from external sources.
those that arise from exposure to financial markets, including credit risk, liquidity risk, and market risk
Risk budgeting consider the risk characteristics of each and how they can be combined to best meet the organization's goals.
is the process of allocating the total risk the firm will take to assets or investments
is determined by top management.
is the overall amount of risk that an organization will take in pursuing its goals.
: Senior management's determination of the organization's risk tolerance, the element of its optimal strategy, and the framework for oversight of the risk management function
Risk management framework features
Performing strategic risk analysis
Communicate across the organization
Monitor risk exposure over time
Manage and mitigate risks to achieve the optimal bundle of risk
Establish the processes and policies for risk tolerance
Determine the organization's overall risk tolerance
Identify and measure existing risks
: is the process of
Putting the structure in place to maintain the bundle of risks that is expected to best achieve the goals
Deciding which risks should be taken, and which should be reduced or avoided.
Determining an acceptable level of overall risk (establishing risk tolerance)
Identifying and measuring the risks that an organization (or portfolio manager, or individual) faces.