The Simple Rules of Risk: Revisiting the Art of Financial by Erik Banks

By Erik Banks

In an age the place businesses and monetary associations are keenly eager about coping with the monetary possibility in their operations, the implementation of quantitative equipment and versions has been of large aid. instruments equivalent to VaR, credits VaR, risk-adjusted returns, and situation analyses have given associations the capability to quantify and comprehend their danger profiles. in spite of the fact that, the point of interest on quantitative threat administration, whereas very important, can occasionally be over-emphasized--at the rate of common sense and event. At its middle, the profitable administration of hazard remains to be principally an "art." the easy ideas of hazard takes a clean examine the qualitative facets of chance administration. It additionally considers how qualitative techniques could make optimum use of the mathematical elements of threat administration to create the best framework attainable.

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Extra info for The Simple Rules of Risk: Revisiting the Art of Financial Risk Management (The Wiley Finance Series)

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For instance, if a company is trying to create appropriate risk boundaries it should consider all of the financial and non-financial risks that might come into play. These might include commodity risk, interest rate risk and currency risk from a financial perspective and catastrophic property and casualty risk, business interruption risk and director’s liability risk from a non-financial perspective. By understanding enterprise risks, the company might decide that some exposures can be mitigated while others cannot, some should be retained and others hedged away, and so forth.

New risks appear on the firm’s books without prior knowledge by those in the risk function or senior management. This indicates disregard for risk policies/limits governing new types of risks, absence of policies designed to control new activities, or inability by senior management to control its business leaders. Risk policies are vague and incomplete, and are routinely misinterpreted and “arbitraged” by businesses. This indicates that the independent risk management function does not fully understand the nature of the business risks it is meant to be controlling or is unable to communicate directives clearly.

In his capacity as an arbitrage trader Leeson was not permitted to sell options or take outright positions. In reality, however, he very quickly began taking outright positions and hiding them in an “error” account. Since no independence existed between the front- and back-offices — Leeson controlled both — he was able to disguise, over a two-year period, a growing number of outright, loss-making positions. Reporting was suppressed or altered in order to obtain funding necessary for exchange margins, and profits were inflated to make the arbitrage business appear very profitable.

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