How Do Firms Manage Financial Risk? - Foundations - Chapter 1 Flashcards
2.1 What are the key risk management components that need to be re-evaluated on a regular basis for designating a risk management road map?
2.1 Re-evaluate regularly changes in: * Risk appetite/risk understandings/stakeholder viewpoint, * Business activity and risk environment (remapping), and * New tools, tactics, cost/benefit analysis.
2.2 Provide several examples to demonstrate that the C-suite supports a strong risk culture.
2.2 The C-Suite can demonstrate it has a strong risk culture through: * Regularly communicating about risk, * Responding in a timely manner to warning signs and near misses, * Periodically testing whether there is a common under-standing of the firm’s risk appetite, * Demonstrating that it has an awareness of the firm’s top ten risks, and * Communicating that the success of the risk manager s is part of a bigger strategic plan.
2.3 Describe what is meant by risk appetite in practical terms.
2.3 First, it is a statement about the firm’s willingness to take risk in pursuit of its business goals. Second, it is the sum of the mechanisms that link this top-level statement to the firm’s day-to-day risk management operations. It assesses the risk exposures the firm is willing to assume in relations to the expected returns from engaging in risky activities.
2.4 Provide examples of what factors drive interest rate risk management.
2.5 Provide examples of hedging tips for conservative end users.
2.6 Describe why modern firms make such a big deal of finan-cial risk management?
2.6 The answer lies in two aspects of risk management. First, the need to manage financial risk grew significantly from the 1970s on because commodity, interest rate, and foreign exchange markets liberalized, and price volatil-ity shot up. Second, growth in market volatility helped spawn a fast-evolving market in financial risk manage-ment instruments through the 1980s and 1990s, giving more opportunities to manage their risk adjusted returns. Globalization of companies and of trading introduced additional financial risk exposures.
2.7 Provide examples of commodity derivatives that a brewery might use to manage their risk.
