Scribd Logo
Upload

Welcome to Scribd!

  • 59 views

    Foundations of Risk Management: FRM Part 1

    Uploaded by

    Javneet Kaur

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Foundations of Risk Management: FRM Part 1

    Uploaded by

    Javneet Kaur
    59 views10 pages

    Original Title

    frm 10

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    59 views10 pages

    Foundations of Risk Management: FRM Part 1

    Uploaded by

    Javneet Kaur

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 10

    FRM Part 1

    Foundations of Risk
    Management

    AIM Statement:
    www.iplanonline.in Risk Management Failures: What are
    They and When Do They Happen?”

    1
    Management
    Foundations of Risk
    FRM Part 1
    AIM Statement:
     Define the role of risk management and explain why a large financial loss is
    not necessarily a failure of risk management.
     Describe how risk management can fail.
     Describe how risk can be mis-measured.
     Explain how a firm can fail to take known and unknown risks into account in
    making strategic decisions.
     Explain the importance of communication in effective risk management.
     Describe how firms can fail to correctly monitor and manage risk on an
    ongoing basis.
     Explain the role of risk metrics and describe the shortcomings of existing risk
    metrics

    © iPlan Education 2
    Role of Risk Management
     To assess all the risks faced by the firm
     To communicate these risks to the risk-taking decision makers
     To manage and monitor risks to ensure that the firm only bears the risks which is desired by the
    shareholders represented by the board of directors

    © iPlan Education 3
    Is large loss a failure?
    • The case of LTCM

    • How risk management can fail?

    © iPlan Education 4
    How risk can be mismeasured
     It can occur when risk managers do not understand the distribution of returns of a single
    risky position or the relationships of the distributions among different positions.
     Correlations tend to increase during times of stress
     Occurrence of extreme events
     some departments may wish to understate risks by using subjective m6asures
     Ignoring relevant risks by management

    © iPlan Education 5
    Failure to include risk in decision making
    • Ignoring the known risks
    • Not being captured by existing models
    • Possibility of unknown risk
    • Missing a risk due to categorization

    © iPlan Education 6
    Communication in effective RM
     Risk managers to provide timely information to top management and board.
     Crucial at the time of crises.
     Communication
     Analyzing, quantifying and assessing  Risk manager

     Decision making to maximize shareholders wealth  Top management

    © iPlan Education 7
    Managing Risk on an ongoing basis

     Risk keep changing without change in position


     Complex derivatives
     Market factors
     Contingency plans
     Identifying possible solutions in different scenarios

    © iPlan Education 8
    Role of Risk Metrics

     Historical data not reliable for prediction


     Often do not capture the risks associated with a crises situation
     Value at Risk (VaR) does not explain the magnitude of losses when in excess of VaR.
     The Risk model may not handle sudden illiquidity.
     It may not capture the dynamic interrelation of various factors during crises.

    © iPlan Education 9
    Thank you

    © iPlan Education 10

    You might also like