Risk Management: Evaluation of the risks

Résumé du document

What is a risk? Risk, in insurance terms, is the eventuality of a loss or other adverse event that has the potential to interfere with an organization's capacity to fulfill its mandate, and for which an insurance claim may be proposed. What is risk management? Risk management makes certain that an organization understands and identifies the risks to which it is exposed. It also guarantees that the organization creates and implements an effective plan to prevent, reduce, or lessen the impact if a loss occurs. A risk management plan includes techniques and strategies for recognizing and confronting these threats. The DV01, also called dollar value of a basis point move, is a measure showing the dollar value of a basis point decrease in interest rates. It shows the change in a bond's price in comparison with a decrease in the bond's yield. This statistic permits us to measure the interest rate risk, which is calculated through the BVP (Basic Point Value). DV01 is an essential value to the BVP establishment. Advantages: This approach permits the clear highlighting of the higher risk level of $50 million 5 year notes paying 10 (7% - 6m libor) + 3% in comparison with a $100 million 30 year Treasury Bonds as well as a $100 million 90 day T-Bills. The notional approach misses this higher risk level.

Extraits

[...] Indeed, DV01 is an essential value to the BVP establishment. Advantages This approach permits to clearly highlighting the higher risk level of a $50 million 5 year notes paying 10 - 6m libor) + in comparison with a $100 million 30 year Treasury Bonds as well as a $100 million 90 day Bills. In fact, the notional approach misses this higher risk level. The main advantage of the DV01 is that it is easy to understand and that it helps to calculate the BVP. [...]

[...] Describe the risk measures you would use to manage the risks in the book Three measures of risk would be use in the book; The value at risk model The sensitivity analysis The stress testing The trading book must detail the risk limits for each risk measure utilized. This involved the description of the macro and micro measures. The owner of the portfolio must have a set of comprehensive risk reports that detail the results of this analysis, as well as a comparison to risk limits, and detail these reports in the manual. To conclude, the required actions when a risk condition occurs are supposed to be clearly detailed in the manual. [...]

[...] Indeed, it uses speculation, which is highly risked. Factors to consider in evaluating effectiveness of the Risk management capabilities According to me, the following elements will permits to evaluate risk management capabilities: Short selling According to Teenanayst.com, short selling is “selling a stock that a person. They hope to profit by buying the stock at a lower price and returning If the hedge fund uses short selling as investment strategy it can suffer of very high losses. Indeed, if the market goes in another way, it wills loss a lot of money. [...]

[...] Describe in the limit structure you would put in place to manage this trading book The role of the trading book is to minimize the probability that errors occur as well as the probability that errors go unnoticed when they occur. The aim is to allow managers to measure, to monitor and to manage the portfolio risks. Then, management of the book is to provide clear and comprehensive information to any stakeholder of the portfolio. The book must provide complete, accurate and timely information on the positions of the portfolio. This information is supposed to be available real-time. [...]

[...] (1965). The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets, The Review of Economics and Statistics 13-39. Damir Wallener, “what is the modern portfolio theory” http://www.wisegeek.com/what-is-modern-portfolio-theory.htm http://www.investordictionary.com E. J. Elton and M. J. [...]