53: Risk Management Flashcards
the risk that extreme events are more likely than the organization’s managers/analysis have assumed
tail risk/downside risk; usually a result of model risk- using inappropriate model assumptions
The probability of extreme negative outcomes in the tail of a distribution
Value at risk VAR (Measure of tail risk)
The magnitude of extreme negative outcomes in the tail of a distribution.
Conditional value at risk (Measure of tail risk)
uncertainty about whether the counterparty a transaction will fulfill its contractual obligations
credit risk (financial risk)
uncertainty about market prices of assets (stocks, commodities, and currencies) and interest rates
Market risk (financial risk)
Buying insurance is best described as a method for an organization to:
Transfer a risk
the risk that the organization will run out of cash and therefore be unable to continue operating
Solvency risk
arises from faulty processes or human error within the organization
Operational risk
The process of:
identify an organization’s risk tolerance, identify the risks it faces,
and monitor or address these risks.
Risk management process; The goal is not to minimize or eliminate risks.
modeling the effects of changes in multiple inputs at the same time
Scenario analysis
examines the effects of changes in a single input
Stress testing
refers to managing a risk by modifying the distribution of outcomes.
Risk shifting; usually with a derivatives contract
measures the market risk of an asset or portfolio
Beta
measures the interest rate sensitivity of the value of a fixed-income security or portfolio
Duration
measures the interest rate sensitivity of the value of a derivative
RHo
senior management’s oversight of the organization’s risk management
Risk governance
The process of defining a level of risk to be taken, with the goal of maximizing the portfolio’s value
Risk management process
the top-down process and guidance that defines risk tolerance, provides risk oversight and guidance to align risk with enterprise goals
risk governance
a process that addresses a common set of factors within different organizations
risk management framework
Provides top decision-makers with a forum for considering risk management issues, at the operational level
Risk committee; part of the risk governance structure, at the operational level
Risk tolerance an risk exposure should be:
kept in alignment; part of the risk management framework
includes the qualitative assessment and evaluation of risk
Risk identification & measurement
This process forces the firm to consider risk tradeoffs, so that the firm can invest where the return per unit of risk is the highest
Risk budgeting
indicates the probability of the minimum loss over a period that will occur
VaR
If a company has a one-day 5% Value at Risk of $1 million, this means:
5% of the time the firm is expected to lose at least $1 million in one day.
Weighing costs versus benefits in light of the organization’s risk tolerance.
The choice of Risk-modification methods
