LM 6: Introduction to Risk Management Flashcards
What is risk exposure?
sensitivity to a certain risk that is quantified
example, banks have assets and liabilities that are sensitive to interest rate risk
What is risk management?
process involves
1. setting an optimal level of risk exposure
2. measuring the actual level of risk exposure
3. making any necessary adjustments to reach the target level
What is risk management framework?
infrastructure, processes, and analytics to support effective risk management.
What are the 7 keys factors to risk management framework? RRRDRCS
-risk governance
-risk identification & measurement
-risk infrastructure
-defined policies & processes
-risk monitoring, mitigation, and management
-communications
-strategic analysis or integration
What is risk governance?
top down process that directs risk management activities to support overall enterprise, usually performed at board level.
What is risk identification & measurement?
organization’s potential risk exposures should be assessed qualitatively and quantified as accurately as possible.
What is risk infrastructure?
people & systems needed to track risk exposures & assess an organizations risk profile
What is defined policies and processes in the risk management framework?
risk management committee that focuses on the specific day to day operations and decisions
What is risk monitoring, mitigation, & management?
continuous monitoring of the situation is needed to determine if a risk exposure is out of line
What is communication in risk management framework?
Relevant information about risk management must be clearly communicated throughout an organization.
What is strategic analysis or integration?
Good risk management is key to increasing a company’s value. A well-integrated risk management strategy can help identify activities that add value as well as those that may be destroying value.
What 3 things does the board do in terms of risk governance? SRR
- set goals
- risk tolerance
- risk budgeting
What does management do in terms of risk governance from board level ? IARI
goals > implement strategies
risk tolerance > allocate to risky activities
risk budgeting > risk exposures
implement policies & procedures
right of arrow is everything management does.
What is the risk management infrastructure 5 specific activities?
identify risks > measure risks > monitor risks > reports (communications) > strategic analysis
What are the 3 responsibilities of risk management committee (aka governing body)? PDS
- providing risk oversight
- determining organizational goals & priorities
- specifying risk tolerance (which risks and levels of exposure are acceptable)
What is enterprise focused risk management?
risk management that takes a holistic (whole) view of the firm
What does the chief risk officer do?
responsible for building & implementing the risk management framework
What is risk tolerance?
identifying how much an organization is willing to lose by accepting exposure to certain costs
What is risk budgeting?
deciding the amount of risk to take on in a portfolio and subdividing the risk over the return sources
Whats the difference between financial risk and non financial risk?
financial risk originate from financial markets
non-financial risk are outside of financial market environment and could be of environmental or regulatory changes.
What is the correct sequence of events for risk governance and manager that focuses on the entire enterprise?
risk budgeting, risk exposures, risk tolerance
- risk tolerance
- risk budgeting
- risk exposures
What are the 3 types of financial risk, describe them?
-market risk (movements in interest rates, exchange rates ,etc that move the market)
-credit risk (the probability of a financial loss resulting from a borrower’s failure to repay a loan)
-liquidity risk (inability to pay short term obligations)
What are 8 non financial risks? SLCMTOSR
- settlement risk
- legal risk
- compliance risk
- model risk
- tail risk
- operational risk
- solvency risk
- risks unique to individuals
What is settlement risk, legal risk, and compliance risk?
settlement risk: possibility of one or more parties fail to deliver on terms of contract
legal risk: sued for various legal reasons
compliance risk: an organization’s legal, financial and criminal exposure if it does not follow industry laws and regulations.