Risk Management

Extract

[...] Advantages We can consider that the possibility of making numerous scenarios is an asset to foreclose financial failures. Furthermore, the calculation is quite simple because only the standard deviation of daily or monthly security returns are computed in order to assess potential losses of portfolios in an unfavorable given time period. Thus, a minimum and a maximum estimations are established under which a portfolio cannot go down or up during a given period. Finally, thanks to the tested scenarios, managers can assess the major macroeconomic and financial risks that have the biggest impacts on their portfolios. [...]

[...] Because different assets in this book have different risk-and-return profiles, they counterbalance each other to generate flatter long-term performance. Undeniably, sometimes, corporate bonds will be well-performing whereas options will be more unsatisfactory. That is why we should manage this book in spreading risk according to money we will invest in. Diversification is a more long-run strategy even if it can get short-term profits. The goal here is that performance of different financial instruments working together will cause a more stable long-term total return. [...]

[...] Why are these factors important in effecting risk management? Consider a portfolio that consists of treasuries, corporate bonds, interest rate swaps and options: Describe in the limit structure you would put in place to manage this trading book Describe the risk measures you would use to manage the risks in the book. Bibliography Introduction The risk management process is definitely marked by several steps that have to be respected in order to avoid financial risk exposure. It actually starts with the establishment of the context for strategic, organizational as well as risk management criterion according to each evaluated risk. [...]

[...] Undeniably, risk management has consistently had trouble keeping up with the complexity and speed of the products. That is why the evolution of risk measures has led to better quantification of potential losses. Thus, in the first part, we are going to deal with the four main risk measures and see their main strengths and weaknesses. Then, we will see an in-depth analysis of the VaR model with its intrinsic elements to carefully consider. We will then evaluate risk measures within a hedge fund. [...]

[...] To put is in a nutshell, analyzing product complexity risk is obviously strategic in implementing a VaR model. Liquidity Liquidity risk is defined as the risk resulting from a lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss[5]. Besides, it is very important to evaluate this liquidity risk, so that managers can always cover a potential loss due to a market fall or other depreciation for examples. It also shows the rapidity of implementing a VaR model and for how much time a financial manager is able to keep an asset in his portfolio without loosing money. [...]