88. Intro to Risk Management Flashcards
Risk Management
1) Identify risk tolerance of organization
2) Identify and measure risks
3) Modify and monitor
Goal of Risk Management
Never to eliminate risk
Higher returns come from holding moderate risk
Risk Governance
Seeking to manage risk in a way that supports overall goals of the organization
Risk budgeting
Process of allocating firm resources to assets by considering risk characteristics
Financial Risks
Risks from exposure to financial markets
- Credit: Uncertainty about counterparty
- Liquidity:Risk of loss when selling an asset
- Market: Uncertainty of market price of assets
Non-financial risks
Risks arising from operations and external sources
[Non-financial] Operational
Human error, faulty organizations will result in losses
[Non-financial] Solvency
Risk of running out of cash
[Non-financial] Model
Analytical models basing the asset valuation are incorrect
[Non-financial] Tail
Extreme events are more likely than original analysis
[Non-financial] Accounting
Risk that accounting policies are judged to be incorrect
Risk measures of assets
- SD: Volatility of asset prices and interest rates
- Beta: Market risk of equity securities
- Duration: price sensitivity of debt to change in interest
Derivative risks
- Delta: sensitivity of derivative values to underlying asset price
- Gamma: Sensitivity of delta changes to underlying asset
- Vega: Derivative values vs. volatility of price in underlying asset
- Rho: Derivative values vs. change in risk free rate
Tail risk
Uncertainty of probability of extreme outcomes
Value at Risk
Minimum loss that will occur with a specific probability
Conditional VaR
Expected value of loss given that the loss exceeds a given amount
Stress testing
Effects of specific changes in key variables on risk
Scenario analysis
What-if analysis of expected loss and changes multiple inputs
Self-insurance
Organization has decided to bear a risk
Risk transfer
Shifting risk to another party
ex) Insurance
Surety bond
Insurance company makes payment if a third party fails to perform terms of a contract
Fidelity bond
Pays for losses that result from employee theft or misconduct
Risk shifting
Changing distribution of possible outcomes by derivative contracts
