RISK MANAGEMENT-A HELICOPTER VIEW

RISK? Any thing which is difficult to predict,involving uncertainity. RISK VS RETURN

RISK MANAGEMENT?-Actively managing type & level of risk.  Higher risk,higher return.
NOT DEFENSIVE(ASKS FOR PROPER  Invest in asset class giving higher return per unit of risk.
PLANNING)  Risk appetite varies with risk.
Risk mgmt & Risk taking are two sides of same POOR RISK MANAGEMENT PRACTICES
coin.(COMPLEMENTARY) Exaggerated potential returns while diminishing perceived potential risks.
Inconsistencies in handling disasters due to Potential for large losses arise from activities that generate,attractive stream of
 herd behavior of risk managers ; profits in short-run.
 financial engineering covering up real economic conds of Lack in adjusting present performance measures in line with future risk.
poorly performing firms in boom period(Eg ABS,MBS) Regulator’s collusion-
 Risk Mgmt technologies are a double edged sword(can When economy is in boom,regulators all around world have colluded with local
be used for risk-reduction , as well as,for taking more
banking industry to allow firms to misreport risky assets on B/S.
risk)
Risk Mgmt(too imp to be left to only rocket scientists)- need of
everyone in organization. JOBS OF A RISK MANAGER
Identify sources and make them visible tokey decision makers & stakeholders.
Giving a distribution estimate rather than a point estimate.
RISK is losses beyond the expectations;unexpected loss.
Implement appropriate policies,methods & infrastructure.
Use statistics to define extent & potential loss via probability
Developing tools for measuring potential returns & losses.
distributions rather than point estimates.
Balancing risk & reward.
Identify risk factors driving volatility.
Clear definition of roles & reporting lines.
Organizations need to have a risk appetite.
POSITIVES IN RISK MGMT NEGATIVES IN RISK MGMT
KEY TASKS ABOUT RISK MGMT  Better future prospects  Challenge to balance fiduciary
Confidence in skills & infrastructure prevalent to  Career path to C level positions responsibilities against the cost
measure Unexpected Loss.  Adoption of sophisticated Risk of offending business heads.
Capital sufficiency to protect against Unexpected Loss. Mgmt processes  Not revenue generator.
Computation of Risk Adjusted NPV(after adjusting for  Addition of new financial  Unified measurements of diff
Cost of Risk Capital)instead of only NPV.Cost of Capital products for Risk Mgmt kinds of risk is diff.
i.e. appropriate returns from risky activities.  Widening of Risk Measurement  Quantifying organisation wide
Communication of target risk profile to everyone. scope to all types of risks. risk exposure is complicated.
 Increase in Global risk mgmt  Risk Mgmt impacts
RISK MANAGEMENT PROCESS industry organization iif perception goes
associations(GARP,PRMIA) to be too risk averse.
Identify risk exposures
i.e. credit,operational
& market risk TYPES OF RISK

BUSINESS RISK NON-BUSINESS RISK

Measure and Find instruments &
estimate risk facilities to shift risk.
exposures. Non-
Decisions Environment
Financial Risk
1.Strategic 1.Macro env Financial
1.Market Risk
(Eg TATA (Eg Trade Risk
Eg Equity price risk (like
Chorus) War) 1.Reputatio
general risk & specific risk);
Assess effects of Assess cost & benefit 2.Product 2.Competitio n
Interest rate risk(Basis
exposures. of instruments (Eg NANO) n (Eg Cyrus
Risk); Commodity Price
(Eg Jio vs Mistry,
Risk;Foreign Exchange Risk.
Bharti vs PWC,Satyam
2.Credit Risk
Vodafone) Scam,PNB)
(Downgrade Risk,Default
3.Technology
Rsik,Settlement Risk)
(Eg Nokia; 2.Regulation
3.Operational Risk
Electric BSIV
RISK MITIGATION STRATEGY Failure in
Cars,Artificial
People,Processes &
Intelligence,
AVOID Systems;Eg;PNB
Data
TRANSFER Fraud.Maggie,ransomware
Analytics
MITIGATE 4.Liquidity Risk(Funding &
Is the need
KEEP Trading Liquidity Risk)
of the hour.)
5.Investment Risk
(Eg: All invtss concentrated
in a single asset class)
Page 47