Approve the risk management policy
What is the purpose of
risk management?
·
Minimize adverse
effects of actual and potential losses by either prevention or risk financing
What are the steps in
the risk management process?
·
determine risk
tolerance
2. identify potential exposures
3. quantify impact level
4. develop and implement risk management strategy
5. monitor exposures and evaluate strategy effectiveness
6. review and modify
What is an example of
a firm that may have a high risk tolerance? Low?
·
High: new firm
attempting to gain competitive advantage
Low: established firm protecting competitive advantage
How should a firm
identify potential exposures (two ways)?
·
in terms of likelihood
and their potential impact
Risk profile
·
refers to how the
company's overall value changes as the price of financial variables change
How should exposures
be quantified (two ways)?
·
quantitatively (assess
materiality, timing of risk, drivers of factors)
2. qualitatively (hedges or asset/liability mgmt)
What are the four
strategies to manage risks? Examples?
·
avoid
2. mitigate (derivatives or B/S hedges)
3. transfer (insurance)
4. retain (must have financial resources to do so)
What if a firm's risk
tolerance changes?
·
risk management
strategy must also adapt
What techniques can be
used to measure risk?
·
sensitivity analysis
2. scenario analysis
3. VaR
4. CaR
5. Monte Carlo simulation
What changes in
sensitivity analysis?
·
a single variable
What changes in
scenario analysis?
·
more than one
variable; worst-, base-, and best-case
What does value at
risk (VaR) estimate?
·
the trading losses for
a given period of time
What does cash flow at
risk (CaR) measure?
·
the risk of a cash
shortfall
Who should approve the
risk management policy?
·
highest level of
management possible
What is enterprise
risk management (ERM)?
·
a comprehensive,
organization-wide approach to identifying, measuring, and managing the various
risks that the threaten the firm's objectives
What three risks are a
direct responsibility of treasury?
·
market, credit, and
liquidity risks
What is market risk?
·
possibility that
fluctuations in rates and prices in the financial markets will reduce portfolio
value
What are the four
types of market risk?
·
equity price risk
2. interest rate risk
3. FX risk
4. commodity price risk
What three risks are
collectively known as "financial risk"?
·
interest rate risk, FX
risk, and commodity risk
What is equity price
risk?
·
volatility in stock
prices
What is credit risk?
·
a type of counterpart
risk; related to how a change in credit quality of a company would affect a
portfolio of investments
What are the two areas
of liquidity risk?
·
funding liquidity and
asset liquidity
What is funding
liquidity?
·
an organization's
ability to raise necessary cash to meets its obligations as they come due
What is event risk?
·
the risk associated
with unexpected events related to an organization
What is business risk?
·
the basic operating
risks, such as uncertainty about demand for products, the price that can be
charged, and the costs associated
What is strategic
risk? Examples?
·
risk associated with
major investments for which there is a significant uncertainty about success or
profitability; investing in new technology or entering into new markets
What is reputation
risk? What is one way to combat this risk?
·
risk that customers,
suppliers, investors, and/or regulators may decide that a company has a bad
reputation and decide not to do business with the firm
have a social media policy implemented to prevent employees from posing a risk
What are the two types
of operational risk? Examples?
·
internal operational
risk (inadequate and failed internal processes, people, and systems)
2. external operational risk (localized events or global economic/political
events)
Most financial
disasters are attributed to a combination of exposure to ______ _____ _____ and
_____ _____ _____.
·
market/credit risk AND
internal audit functions
What are the three
types of internal operational risk? How can these risks be mitigated?
·
employee risk -
develop a strong internal controls
2. process risk (procurement, manufacturing, sales, fulfillment) - ensure
employees follow procedures
3. technology risk
What is sovereign
risk?
·
risk of interference
by a foreign government in the settlement or payment of a foreign transaction
What is political
risk?
·
the economic impact
that businesses may face due to political changes
How can a company
reduce the risks associated with theft or fraud?
·
have proper internal
controls and use armored car services
What are the four
fundamental factors for an operational risk management strategy?
·
instill culture
2. internal controls
3. technology - reduce manual errors
4. guidelines for the board of directors - how many directors/executives can
travel together, limit number of internal board members, etc
What are five steps in
developing disaster recovery and business continuity plans?
·
identify critical
functions
2. assess risks - determine drivers and what would happen if it happened
3. evaluate alternative actions if risk occurred
4. prioritize corrective actions
5. develop parallel communication plan
What is the most
common method way of transferring risk from one party to another?
·
insurance
What criteria should
be evaluated when selecting an insurer?
·
long-term solvency,
rating, service provided, cost vs. exposure, industry knowledge and experience
total cost of risk (TCOR)
What are the five
risk-financing techniques (risk retention)?
·
non-insurance
(negligible)
2. self-insurance (assets set aside; employee health care)
3. single-parent captive (subsidiary owned for purpose of insuring parent)
4. group captive/association captive
5. risk retention group (lawyers, doctors)
What are the common
techniques for risk transfer?
·
contractual transfer
(hold harmless)
2. guarantee cost insurance (most common)
3. retro rated insurance
USA 
India