Introduction

In ideal risk management, a prioritization process is followed whereby the risks with the
greatest loss and the greatest probability of occurring are handled first, and risks with lower
probability of occurrence and lower loss are handled in descending order. In practice the
process can be very difficult, and balancing between risks with a high probability of
occurrence but lower loss versus a risk with high loss but lower probability of occurrence
can often be mishandled. Risk management also faces difficulties in allocating resources.
This is the idea of opportunity cost. Resources spent on risk management could have been
spent on more profitable activities. Again, ideal risk management minimizes spending and
minimizes the negative effects of risks.

Method

For the most part, these methods consist of the following elements, performed, more or
less, in the following order.

1. identify, characterize, and assess threats

2. assess the vulnerability of critical assets to specific threats
3. determine the risk (i.e. the expected consequences of specific types of attacks on
specific assets)
4. identify ways to reduce those risks
5. prioritize risk reduction measures based on a strategy

Principles of risk management

Risk management should:

 create value
 be an integral part of organizational processes
 be part of decision making
 explicitly address uncertainty
 be systematic and structured
 be based on the best available information
 be tailored
  take into account human factors
 be transparent and inclusive
 be dynamic, iterative and responsive to change
 be capable of continual improvement and enhancement

Process

According to the standard ISO 31000 "Risk management -- Principles and guidelines on
implementation," the process of risk management consists of several steps as follows:

Establishing the context

Establishing the context involves:

1. Identification of risk in a selected domain of interest

2. Planning the remainder of the process.
3. Mapping out the following:
o the social scope of risk management
o the identity and objectives of stakeholders
o the basis upon which risks will be evaluated, constraints.
4. Defining a framework for the activity and an agenda for identification.
5. Developing an analysis of risks involved in the process.

Identification

After establishing the context, the next step in the process of managing risk is to identify
potential risks. Risks are about events that, when triggered, cause problems. Hence, risk
identification can start with the source of problems, or with the problem itself.

 Source analysis Risk sources may be internal or external to the system that is the
target of risk management.

Examples of risk sources are: stakeholders of a project, employees of a company or the

weather over an airport.
 Problem analysis Risks are related to identified threats. For example: the threat of
losing money, the threat of abuse of privacy information or the threat of accidents and
casualties. The threats may exist with various entities, most important with
shareholders, customers and legislative bodies such as the government.When either
source or problem is known, the events that a source may trigger or the events that
can lead to a problem can be investigated. For example: stakeholders withdrawing
during a project may endanger funding of the project; privacy information may be
stolen by employees even within a closed network; lightning striking an aircraft
during takeoff may make all people onboard immediate casualties.The chosen method
of identifying risks may depend on culture, industry practice and compliance. The
identification methods are formed by templates or the development of templates for
identifying source, problem or event. Common risk identification methods are:

 Objectives-based risk identification Organizations and project teams have

objectives. Any event that may endanger achieving an objective partly or completely
is identified as risk.
 Scenario-based risk identification In scenario analysis different scenarios are
created. The scenarios may be the alternative ways to achieve an objective, or an
analysis of the interaction of forces in, for example, a market or battle. Any event that
triggers an undesired scenario alternative is identified as risk - see Futures Studies for
methodology used by Futurists.
 Taxonomy-based risk identification The taxonomy in taxonomy-based risk
identification is a breakdown of possible risk sources. Based on the taxonomy and
knowledge of best practices, a questionnaire is compiled. The answers to the
questions reveal risks.[5]
 Common-risk checking In several industries, lists with known risks are available.
Each risk in the list can be checked for application to a particular situation.[6]
 Risk charting[7] This method combines the above approaches by listing resources at
risk, Threats to those resources Modifying Factors which may increase or decrease the
risk and Consequences it is wished to avoid. Creating a matrix under these headings
enables a variety of approaches. One can begin with resources and consider the threats
they are exposed to and the consequences of each. Alternatively one can start with the
threats and examine which resources they would affect, or one can begin with the
 consequences and determine which combination of threats and resources would be
involved to bring them about.

Assessment

Once risks have been identified, they must then be assessed as to their potential
severity of loss and to the probability of occurrence. These quantities can be either simple
to measure, in the case of the value of a lost building, or impossible to know for sure in the
case of the probability of an unlikely event occurring. Therefore, in the assessment process
it is critical to make the best educated guesses possible in order to properly prioritize the
implementation of the risk management plan.

The fundamental difficulty in risk assessment is determining the rate of occurrence

since statistical information is not available on all kinds of past incidents. Furthermore,
evaluating the severity of the consequences (impact) is often quite difficult for immaterial
assets. Asset valuation is another question that needs to be addressed. Thus, best educated
opinions and available statistics are the primary sources of information. Nevertheless, risk
assessment should produce such information for the management of the organization that
the primary risks are easy to understand and that the risk management decisions may be
prioritized. Thus, there have been several theories and attempts to quantify risks. Numerous
different risk formulae exist, but perhaps the most widely accepted formula for risk
quantification is:

Rate of occurrence multiplied by the impact of the event equals risk

Risk reducing techniques

Once risks have been identified and assessed, all techniques to manage the risk fall into one
or more of these four major categories:

 Avoidance (eliminate, withdraw from or not become involved)

 Reduction (optimize - mitigate)
 Sharing (transfer - outsource or insure)
  Retention (accept and budget)

Derivatives:

Derivatives are securities derived from other securities (caused underlying securities) like
equity, debt, or ay other type of securities.

In India derivatives started In June 2000 with SEBI approval. Trading in derivatives in India
mostly takes place in NSE. The derivatives turn over was only Rs.4018 crore during 2000-
01.which increases to Rs.442333 crores in 2002-03.

Derivatives and risk hedging:

The term derivative can simply be understood as those items that do not have their own
independent values , rather they have desired values. In case of stock option underlying asset
is share of a company. Derivatives are tools to reduce a firms exposure.

Hedging is the term used for reducing risk by using derivatives.

There are several advantages of better risk management through hedging:

1. Debt capacity enhancement.

2. Increased focus on operations.

3. Isolating managerial performance.

1. Debt capacity enhancement:

Financial risk management helps to understand and management investment &

financial risk.

2 .Increased focus on operations:

Financial risk management requisites management to hedge against possible

movements of interest rates & exchange rates. These are not under the control
of managers nor can they predict their behaviour.

3. Isolating managerial performance:

 Hedging helps to separate out the effects of fluctuating external factors good
or bad on firms profitability.

Review of derivative research

The proliferation of derivative assets during the past two decades is unprecedented. With this
growth in derivatives comes the need for financial institutions institutional investors and
corporations to use sophisticated quantitative techniques to take full advantage of the
spectrum of these new financial instruments. Academic research has significantly contributed
to our understanding of derivative assets and markets. The growth of derivative asset markets
has been accompanied by a commensurate growth in the volume of scientific research. The
rapid growth of derivatives research combined with the current absence of a rigorous research
journal catering to the area of derivatives and the long lead-times in the existing academic
journals underlines the need for Review of Derivatives Research which provides an
international forum for researchers involved in the general areas of derivative assets. The
Review publishes high quality articles dealing with the pricing and hedging of derivative
assets on any underlying asset (commodity interest rate currency equity real estate traded or
non-traded etc.). Specific topics include but are not limited to: econometric analyses of
derivative markets (efficiency anomalies performance etc.) analysis of swap markets market
microstructure and volatility issues regulatory and taxation issues credit risk new areas of
applications such as corporate finance (capital budgeting debt innovations) international trade
(tariffs and quotas) banking and insurance (embedded options asset-liability management)
risk-sharing issues and the design of optimal derivative securities risk management
management and control valuation and analysis of the options embedded in capital projects
valuation and hedging of exotic options new areas for further development (i.e. natural
resources environmental economics. The Review has a double-blind refereeing process. In
contrast to the delays in the decision making and publication processes of many current
journals the Review will provide authors with an initial decision within nine weeks of receipt
of the manuscript and a goal of publication within six months after acceptance. Finally a
section of the journal is available for rapid publication on 'hot' issues in the market small
technical pieces and timely essays related to pending legislation and policy.
Research in banking

The Research and Development activities of the Institute are aimed at improving Banking
Technology in the country. While addressing the immediate concerns of the Banking Sector,
the Research at the Institute is focused towards anticipating the future needs and requirements
of the sector and developing technologies to address them. The Focal Areas of Research in
the Institute, currently, are: 

                             Financial Networks and Applications 

                             Electronic Payments and Settlement Systems 
                             Security Technologies for the Financial Sector 
                             Technology Based Education, Training and Development 
                             Financial Information Systems and Business Intelligence

IDRBT is also collaborating with Academic Institutions and Research Organisations in India
such as the Indian Institute of Technology, Mumbai, Indian Institute of Technology Madras,
University of Hyderabad, and also teaming up with Institutions abroad such as Queensland
University of Technology, Australia, for promoting higher education, research and
development in Banking Technology in India. 

The Institute is actively involved in the development of various standards and systems for
Banking Technology, in coordination with the Reserve Bank of India, Indian Banks�
Association, Ministry of Communication and Information Technology, Government of India,
and the various high-level committees constituted at the industry and national levels