This document provides an introduction to risk management. It defines risk as the probability of an undesired event multiplied by its consequences. There are various types of risk, including market risk, credit risk, and operational risk. Risk is measured using techniques like value at risk and profit and loss. Credit ratings are important but not always reliable indicators of risk. Effective risk management requires understanding potential risks from diverse sources, quantifying exposures, and implementing systems to monitor and report on risk.
Credit risk refers to the risk that a borrower will default on any type of debt by failing to make payments which it is obligated to do. The risk is primarily that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be complete or partial and can arise in a number of circumstances. For example:
• A consumer may fail to make a payment due on a mortgage loan, credit card, line of credit, or other loan
• A company is unable to repay amounts secured by a fixed or floating charge over the assets of the company
• A business or consumer does not pay a trade invoice when due
• A business does not pay an employee's earned wages when due
• A business or government bond issuer does not make a payment on a coupon or principal payment when due
• An insolvent insurance company does not pay a policy obligation
• An insolvent bank won't return funds to a depositor
• A government grants bankruptcy protection to an insolvent consumer or business.
To reduce the lender's credit risk, the lender may perform a credit check on the prospective borrower, may require the borrower to take out appropriate insurance, such as mortgage insurance or seek security or guarantees of third parties, besides other possible strategies. In general, the higher the risk, the higher will be the interest rate that the debtor will be asked to pay on the debt.
Credit risk refers to the risk that a borrower will default on any type of debt by failing to make payments which it is obligated to do. The risk is primarily that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be complete or partial and can arise in a number of circumstances. For example:
• A consumer may fail to make a payment due on a mortgage loan, credit card, line of credit, or other loan
• A company is unable to repay amounts secured by a fixed or floating charge over the assets of the company
• A business or consumer does not pay a trade invoice when due
• A business does not pay an employee's earned wages when due
• A business or government bond issuer does not make a payment on a coupon or principal payment when due
• An insolvent insurance company does not pay a policy obligation
• An insolvent bank won't return funds to a depositor
• A government grants bankruptcy protection to an insolvent consumer or business.
To reduce the lender's credit risk, the lender may perform a credit check on the prospective borrower, may require the borrower to take out appropriate insurance, such as mortgage insurance or seek security or guarantees of third parties, besides other possible strategies. In general, the higher the risk, the higher will be the interest rate that the debtor will be asked to pay on the debt.
Mercer Capital's Community Bank Stress Testing: What You Need to KnowMercer Capital
While there is no legal requirement for community banks to perform stress tests, recent regulatory commentary suggests that community banks should be developing and implementing some form of stress testing on at least an annual basis.
Whether you are considering performing the test in-house or with outside assistance, this webinar will be of interest to you. This webinar: covers the basics of community bank stress testing; reviews the economic scenarios published by the Federal Reserve; provides detail on the key steps to developing a sound community bank stress test; and discusses how to analyze and act upon the outputs of your stress tests.
Managers use a short-term horizon to maximize their utility function. Short-term profitability of banking institutions is one of the most important determinants of bonus packages and managers are therefore motivated to produce highest possible returns on equity by lowering equity buffers to the lowest possible level. Framing effects approach shows that managers engage into risk seeking behavior in order to avoid sure loss (thus, to guarantee that they receive higher bonus), although risk adverse behavior is a preferred choice. Lessons learned from the financial crisis are the importance of introducing behavioral finance concepts into a daily banking activities, increase information transparency, and try to find alternative measures of managers’ efficiency – measures that would stimulate setting up long-term value functions.
Generating income for your portfolio in a late-cycle marketnetwealthInvest
Learn how you can defend your portfolio in times of heightened market volatility and explore the different types of fixed-income investments with Paul Chin, Head of Investment Strategy and Research at Jamieson Coote Bonds.
Capital Adequacy Stress Tests: Pre-Provision Net Revenue and Scenario DesignCRISIL Limited
CRISIL Global Research & Analytics (GR&A) conducted a web-conference on March 26, 2014 on Capital Adequacy Stress Testing. The web-conference, attended by risk and stress testing practitioners from around the world, focused on why banks need risk models with greater integration across projections. It threw light on how Pre-Provision Net Revenue (PPNR) modelling specifically has assumed critical importance since the original stress tests by the US Federal Reserve following the 2008 economic crisis.
Mercer Capital's Community Bank Stress Testing: What You Need to KnowMercer Capital
While there is no legal requirement for community banks to perform stress tests, recent regulatory commentary suggests that community banks should be developing and implementing some form of stress testing on at least an annual basis.
Whether you are considering performing the test in-house or with outside assistance, this webinar will be of interest to you. This webinar: covers the basics of community bank stress testing; reviews the economic scenarios published by the Federal Reserve; provides detail on the key steps to developing a sound community bank stress test; and discusses how to analyze and act upon the outputs of your stress tests.
Managers use a short-term horizon to maximize their utility function. Short-term profitability of banking institutions is one of the most important determinants of bonus packages and managers are therefore motivated to produce highest possible returns on equity by lowering equity buffers to the lowest possible level. Framing effects approach shows that managers engage into risk seeking behavior in order to avoid sure loss (thus, to guarantee that they receive higher bonus), although risk adverse behavior is a preferred choice. Lessons learned from the financial crisis are the importance of introducing behavioral finance concepts into a daily banking activities, increase information transparency, and try to find alternative measures of managers’ efficiency – measures that would stimulate setting up long-term value functions.
Generating income for your portfolio in a late-cycle marketnetwealthInvest
Learn how you can defend your portfolio in times of heightened market volatility and explore the different types of fixed-income investments with Paul Chin, Head of Investment Strategy and Research at Jamieson Coote Bonds.
Capital Adequacy Stress Tests: Pre-Provision Net Revenue and Scenario DesignCRISIL Limited
CRISIL Global Research & Analytics (GR&A) conducted a web-conference on March 26, 2014 on Capital Adequacy Stress Testing. The web-conference, attended by risk and stress testing practitioners from around the world, focused on why banks need risk models with greater integration across projections. It threw light on how Pre-Provision Net Revenue (PPNR) modelling specifically has assumed critical importance since the original stress tests by the US Federal Reserve following the 2008 economic crisis.
How to establish strategic approach to ISO 9001:2015PECB
Using QMS as a Strategic Business Framework by Establishing and Quantifying Business Objectives and its Impacts, Mapping Core Competencies (Technical-Behavioral) and Analyzing Business Information captured throughout the business process cycle using Interactive Business Dashboards; leads to Business Improvement initiatives and results in the growth of the entire business itself.
Main points covered:
• Using QMS as a Strategic Business Framework
• How to establish and Quantify Business Objectives and its impact to your business
• How to return your investment and what value ISO 9001 bring into business
Presenter:
This webinar was presented by Muhamed Farooque; Muhamed is Business Performance Management Specialist with the excellent knowledge base in ISO Management Systems, Business Process Improvement and Business Analytics Practices. ISO Management Systems: Qualified Lead Auditor for ISO 9001-ISO 14001-OHSAS 18001, Lean Six Sigma Black Belt etc.
Link of the recorded session published on YouTube: https://youtu.be/66qt6O-Nstc
This quality system procedure fills the Major gap in ISO 9001:2008 QSM documentation when transitioning to the new version of ISO 9001:2015; is based on the practical experience of the Enterprise Risk Management implementation, and corresponds to the requirements of ISO 9001:2015 and ISO 31000:2009
Risk Management Requirements Implementation in ISO 9001:2015 Clauses including Objects and Subjects of Control as well as recommended regulatory document (if provided in the Standard)
Risk assessment techniques a critical success factorPECB
The webinar has discussed the most commonly utilized tools and the reasons why their success is limited. In addition, risk identification and assessment techniques as part of ISO 31010 will are analyzed.
Presenter:
The presenter of this webinar is Eddie de Vries, a PECB ISO 31000 certified Risk Manager and Trainer with 20 years’ experience in Quality Management and more than 12 years’ experience in Enterprise Risk Management.
Link of the recorded session published on YouTube: https://youtu.be/KiL5ufPeAFE
In this presentation, we review methods and best practices for the portfolio construction and evaluation process. The presentation covers risk and return estimation, mean-variance optimization as well as techniques for analyzing exposure to loss and wealth potential.
In this study we survey practices and supervisory expectations for stress testing (ST), in a credit risk framework for banking book exposures. We introduce and motivate ST; and discuss the function, supervisory requirements and expectations, credit risk parameters, interpretation results
with respect to ST. This includes a typology of ST (uniform testing, risk factor sensitivities, scenario analysis; and historical, statistical and hypothetical scenarios) and procedures for con-ducting ST. We conclude with two simple and practical stress testing examples, one a ratings migration based approach, and the other a top-down ARIMA modeling approach.
On Thursday, April 27th, 2017, we heard from Windham's own client consultant, Jon Kazarian about best methods and practices for the portfolio construction and evaluation process.
Asset Allocation for Specific Client GoalsWindham Labs
On Wednesday, January 24th, we heard from Senior Client Consultant Jon Kazarian on how to tailor a portfolio to meet the specific investment goals of a client.
Variance based Case Study done by Predictive analytics for Market based , Credit based Risk
( Source & Inferences : Saxton Report on Housing crisis to US Congress) and Operational Risk
( Source & Inferences : The Time Cycle Module Volume I, Product launch of a soft drink brand)
In this presentation I gave in the Financial Republic’s 2017 CECL Conference, I discussed the impacts of CECL on modeling and risk management with a focus on the reasonable and supportable forecast.
Nick Wade Using A Structural Model For Enterprise Risk, Dst Conference 2011...yamanote
On why a multi-factor or structural model of risk might be a good idea at the enterprise level, rather than the more common VaR models based simply on historical returns
Aligning impact from boardrooms to pixelsMichael Le
This is my talk from Agile Australia 2017 on the topic of how using objective and key results (OKRs) helps companies alignment from vision to execution.
Slides from the Sydney Tech Talk Meetup on how to prototype using Framer. Originally hosted on May 16, 2017 in Sydney, Australia https://www.meetup.com/PivotalSydney-Tech-Talks/events/239814556/
How does privacy in technology affect the user experience? What can we do about it?
Presented at SmashingConf Jam Session in Oxford and General Assembly London's event UX: The Good, The Bad and The Ugly
Design is an essential key to building the right product. However research and exploration can take time. Working a sprint ahead can help UX and design teams get designs ready for development. But is that truly agile?
Key points
- Be part of product strategy
- Deliver learnings
- Flexibility in the process
An alternative to alcohol monitoring apps. Instead of counting up on the number of drinks it uses the concept of counting down.
https://play.google.com/store/apps/details?id=com.lifeofmle.drinksy.app&hl=en
what is the future of Pi Network currency.DOT TECH
The future of the Pi cryptocurrency is uncertain, and its success will depend on several factors. Pi is a relatively new cryptocurrency that aims to be user-friendly and accessible to a wide audience. Here are a few key considerations for its future:
Message: @Pi_vendor_247 on telegram if u want to sell PI COINS.
1. Mainnet Launch: As of my last knowledge update in January 2022, Pi was still in the testnet phase. Its success will depend on a successful transition to a mainnet, where actual transactions can take place.
2. User Adoption: Pi's success will be closely tied to user adoption. The more users who join the network and actively participate, the stronger the ecosystem can become.
3. Utility and Use Cases: For a cryptocurrency to thrive, it must offer utility and practical use cases. The Pi team has talked about various applications, including peer-to-peer transactions, smart contracts, and more. The development and implementation of these features will be essential.
4. Regulatory Environment: The regulatory environment for cryptocurrencies is evolving globally. How Pi navigates and complies with regulations in various jurisdictions will significantly impact its future.
5. Technology Development: The Pi network must continue to develop and improve its technology, security, and scalability to compete with established cryptocurrencies.
6. Community Engagement: The Pi community plays a critical role in its future. Engaged users can help build trust and grow the network.
7. Monetization and Sustainability: The Pi team's monetization strategy, such as fees, partnerships, or other revenue sources, will affect its long-term sustainability.
It's essential to approach Pi or any new cryptocurrency with caution and conduct due diligence. Cryptocurrency investments involve risks, and potential rewards can be uncertain. The success and future of Pi will depend on the collective efforts of its team, community, and the broader cryptocurrency market dynamics. It's advisable to stay updated on Pi's development and follow any updates from the official Pi Network website or announcements from the team.
Even tho Pi network is not listed on any exchange yet.
Buying/Selling or investing in pi network coins is highly possible through the help of vendors. You can buy from vendors[ buy directly from the pi network miners and resell it]. I will leave the telegram contact of my personal vendor.
@Pi_vendor_247
how to sell pi coins at high rate quickly.DOT TECH
Where can I sell my pi coins at a high rate.
Pi is not launched yet on any exchange. But one can easily sell his or her pi coins to investors who want to hold pi till mainnet launch.
This means crypto whales want to hold pi. And you can get a good rate for selling pi to them. I will leave the telegram contact of my personal pi vendor below.
A vendor is someone who buys from a miner and resell it to a holder or crypto whale.
Here is the telegram contact of my vendor:
@Pi_vendor_247
Exploring Abhay Bhutada’s Views After Poonawalla Fincorp’s Collaboration With...beulahfernandes8
The financial landscape in India has witnessed a significant development with the recent collaboration between Poonawalla Fincorp and IndusInd Bank.
The launch of the co-branded credit card, the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card, marks a major milestone for both entities.
This strategic move aims to redefine and elevate the banking experience for customers.
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
However, Pi Network has announced plans to launch its Testnet and Mainnet in the future, which may include listing Pi on exchanges.
The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
If you want to sell your pi coins, reach out to a pi vendor and sell them to anyone looking to sell pi coins from any country around the globe.
Below is the contact information for my personal pi vendor.
Telegram: @Pi_vendor_247
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
The secret way to sell pi coins effortlessly.DOT TECH
Well as we all know pi isn't launched yet. But you can still sell your pi coins effortlessly because some whales in China are interested in holding massive pi coins. And they are willing to pay good money for it. If you are interested in selling I will leave a contact for you. Just telegram this number below. I sold about 3000 pi coins to him and he paid me immediately.
Telegram: @Pi_vendor_247
The Evolution of Non-Banking Financial Companies (NBFCs) in India: Challenges...beulahfernandes8
Role in Financial System
NBFCs are critical in bridging the financial inclusion gap.
They provide specialized financial services that cater to segments often neglected by traditional banks.
Economic Impact
NBFCs contribute significantly to India's GDP.
They support sectors like micro, small, and medium enterprises (MSMEs), housing finance, and personal loans.
how to sell pi coins effectively (from 50 - 100k pi)DOT TECH
Anywhere in the world, including Africa, America, and Europe, you can sell Pi Network Coins online and receive cash through online payment options.
Pi has not yet been launched on any exchange because we are currently using the confined Mainnet. The planned launch date for Pi is June 28, 2026.
Reselling to investors who want to hold until the mainnet launch in 2026 is currently the sole way to sell.
Consequently, right now. All you need to do is select the right pi network provider.
Who is a pi merchant?
An individual who buys coins from miners on the pi network and resells them to investors hoping to hang onto them until the mainnet is launched is known as a pi merchant.
debuts.
I'll provide you the Telegram username
@Pi_vendor_247
Empowering the Unbanked: The Vital Role of NBFCs in Promoting Financial Inclu...Vighnesh Shashtri
In India, financial inclusion remains a critical challenge, with a significant portion of the population still unbanked. Non-Banking Financial Companies (NBFCs) have emerged as key players in bridging this gap by providing financial services to those often overlooked by traditional banking institutions. This article delves into how NBFCs are fostering financial inclusion and empowering the unbanked.
2. Outline
What is Risk?
2. Risk is Everywhere
3. Risk is Not Equal
4. Measuring Risk
5. Decision Making with Risk
6. Risk Management Systems
1.
3.
4. What is Risk?
The Chinese symbol for risk is a combination
of both danger and opportunity
Risk = P(undesired event) x Consequence
In finance, risk is the variability of actual
returns around the expected return
5. Market Risk
Risk that value of investment will decrease due to
changes in market factors
Common types of market risk
Interest Rate Risk
Equity Risk
Currency Risk
Measured with Value at Risk (VaR)
6. Credit Risk
Risk of loss due to default on payment
on a loan or other types of credit
Structured credit risk is measured with
the Merton Model or asset value model
Credit risk is commonly associated with
credit ratings.
7. Operational Risk
Differs from market and credit risk
“The risk of loss resulting from
inadequate or failed internal processes,
people and systems or from external
events”
8. Examples of Operational
Risk
Internal Fraud
External Fraud
Employment Practices and Workplace
Safety
Clients, Products, & Business
Damage to Physical Assets
Business Disruption & Systems Failures
Execution, Delivery, & Process
Management
9.
10. Decision Making with Risk
Decisions making in finance requires a
degree of risk taking with it these are
some of the areas where risk affects
decision making
Investment Choices
Corporate Finance
11. Investment Choices
Investment choices looks at the different
assets to come up with a portfolio
design for the risk aversion of an
investor
Asset Allocation
Asset Selection
Performance Evaluation
12. Corporate Finance
Corporate finance is related to decisions
that corporations make related to
running the business.
Investment decisions
Financing decisions
Dividend decisions
13.
14. Risk is Everywhere
Risks will come from places one would
least expect it and in a form that them to
come from and in unanticipated forms.
Good risk management is to be able to
adapt when confronted with the
unexpected.
15. Risk from Global Exposure
The Chinese Correction
27 February 2007
With rumors that China would raise the
interest rate to curb inflation, the
Shanghai Stock Exchange dropped 9%.
16. Result of the Chinese
Correction
DOW Jones Industrial Average (DJIA)
fell 416 points
This was the largest single day fall since
the 9/11 attack in 2001 where the DJIA
fell 684 points.
17. Risk from Different Businesses
Best example of this is with the sub-prime
mortgages and collateral debt obligations
(CDOs)
In 2000, Credit Suisse issued a $340.7
million CDO.
It was a mix of junk bonds and sub prime
home loans
By 2006, the CDO losses totaled $125
million
18. Credit Suisse CDO - 2000
Amount (in millions)
Tranche
Rating
$293.5
Senior
AAA
$13.0
Mezzanine
A
$17.0
Mezzanine
BBB-
$11.2
Equity
Not Rated
$6.0
Equity
Not Rated
19. Credit Suisse CDO - 2006
Amount (in millions)
Tranche
Rating
$220.5
Senior
AAA
$0
Mezzanine
A
$0
Mezzanine
BBB-
$0
Equity
Not Rated
$0
Equity
Not Rated
20. Subprime Primer
Banks were originally not allowed to
invest in mortgages because they were
not investment grade.
In the 1980s, banks started to package
mortgages into collateral debt
obligations through securitization.
Thus mortgages are now were able to
be traded and invested.
21.
Subprime mortgages are those from
buyers with weak credit and are usually
charged 2 percentage points higher than
those with good ratings
22.
Exotic mortgages such as no-doc loans
allowed people with bad credit to take
loans without documentation to show
evidence of income or savings
23.
Big banks buy the loans from the
lenders and small banks and securitize
the loans into CDOs with the help of
rating companies to achieve the desired
rating.
24.
By engineering products with high
ratings (AAA), investors liked CDOs
because of the high returns compared to
bonds of same rating.
25. To add noise to the confusion, CDOs
can be multiplied with CDO squareds
and CDO cubeds
This only hid the underlying assets even
more.
26.
As subprime mortgages defaulted by
people who had bad credit. The CDOs
began to default as well.
27.
28.
Due to the complex nature of CDOs it
was hard to see what was the
underlying assets.
We just believed the credit risk ratings
31. Who
Fitch Ratings (U.S.)
Moody's (U.S.)
Standard & Poor's (U.S.)
A. M. Best (U.S.)
Baycorp Advantage (Australia)
Dominion Bond Rating Service (Canada)
Pacific Credit Rating (Peru)
Egan-Jones Ratings Company (U.S.)
Capital Intelligence Ltd (Cyprus)
32.
33. Credit Ratings are Not
Equal
Ratings from one type of instrument do
not translate directly for comparison with
another instrument
“In CDO –land, there’s almost no
difference between Baa and Ba” –
Arturo Cifuentes, former Moody’s
executive
34.
Corporate bonds rated Baa (Moody’s)
from 1983 to 2005
Default rate 2.2 percent over 5 year periods
CDOs rated Baa (Moody’s) from 1983 to
2005
Default rate 24 percent over 5 year periods
35. Rating agencies work with banks
In financial engineering for securitization,
rating agencies consult with banks on how
to structure the CDO
CDOs aren’t regulated like bonds. They are
sold in private placements and current
values are not posted
Financial regulators effectively outsourced
the monitoring of CDOs to rating agencies
36. Analyze the Money
Revenue between rating bonds and
CDOs (S&P)
Corporate bonds - $212,500
CDOs - $600,000
Revenue from analyzing CDOs in 2006
Moodys - $204 million
Fitch Ratings - $480.5 million
37.
38. Issues with CDO ratings
Garbage in, garbage out
Due to complex nature (many moving
parts), must account for possibility of
many things going wrong.
Financial products are being more
complex for current methodologies.
39.
“The credit ratings and observations
contained herein are solely statements
of opinion and not statements of fact or
recommendations to purchase, hold, or
sell any securities or make any other
investment decisions.
Accordingly, any user of the information
contained herein should not rely on any
credit rating or other opinion contained
herein in making any investment
decision.” – S&P
40. Credit Ratings
The lack of transparency and potential
conflict of interest makes it hard for
ratings to be taken at face value.
Good risk management would involve
understanding how the products were
rated.
41.
42. Measuring Risk
Quantifying and measuring risk is one of
the key points of risk management
Focus will be on common risk
measurements
Value at Risk (VaR)
Profit and Loss (PnL)
43. Value at Risk (VaR)
Focuses on volatility both up and down
VaR statistic is made up of 3 parts
Time Period
Confidence Interval
Loss amount (percentage)
“What is the most I can lose with 95%
confidence in the next month?”
47. VaR: Variance Covariance
Method
Assumes
that stock returns are
normally distributed
Variance
measures how actual
returns vary around the expected
return
Covariance
tells us how two assets
are correlated
50.
Portfolio with 2 assets A and B
70% invested in A
30% invested in B
Standard Deviation of A (σA) is 10%
Standard Deviation of B (σB) is 20%
Correlation coefficient (ρAB) is 0.5
σP 2= (0.7) 2(10) 2 + (0.3) 2(20) 2 +
2(0.7)(0.3)(10)(20)(.05) = 127
Portfolio Std. Dev = σP = 11.27%
52. Putting it all together
Build normal distribution
Variance = σP 2
Standard Deviation = σP
Mean (weighted average rate of return)
Confidence
Std. Dev.
Calculation
Result
95%
2.64%
1.65 x 2.64
4.36%
99%
2.64%
2.33 x 2.64
6.16%
53. VaR: Monte Carlo
Simulations
Develop model for future stock prices
Run multiple hypothetical trials
Randomly generate trials (random
inputs)
55. Comparison
Monte Carlo – Complex
Historical Method – Requires gathering
historical data and number crunching
Variance Covariance – Easiest because
number are on readily available
56.
57. What time is it?
To convert one VaR of one time period
to another time period
Multiply standard deviation by square
root of the time period.
Recalculate
Ex. σDaily = 2.5%
σmonthly = σDaily x √20 = 11.18%
58. Profit and Loss (PnL)
Statement that summarizes
the revenues, costs and expenses
incurred during a specific period of time.
DAILY PnL
Market Moves
Swap Rates
FX Changes
Rates resets
Trading
Amendments
$9,000
$25,000
-$100,000
$5,000
$80,000
-$1,000
59.
It’s market close time, suddenly you
hear
“How’s my PnL?”
“Let me check”
Now we will look at how it put all
together in a bank
61. Basic Flow
System reads security positions for book
Read the closing values
Reads the individual trades in the book
Calculate the mark to market value of
the trade
Calculate PnL,VaR, Sensitivities
Done
62. Reality
There are thousands of books, hundreds of
trading desks and different business units
Different ways of storing and sending data.
Different close times for data
Must be calculated for next morning
(T+1PnL)
Reports generated within one hour of
market close is called T+0PnL
Risk versus probability - The probability of the event occurring and the consequences of the event. Thus, the probability of a severe earthquake may be small, but the consequences are so catastrophic that it would be categorized as a high-risk event.Risk versus threat - A threat is a low-probability event with large negative consequences, where analysts may be unable to assess the probability. A risk, on the other hand, is defined to be a higher probability event, where there is enough information to assess both the probability and the consequences.All outcomes versus negative outcomes— Some definitions of risk tend to focus only on the downside scenarios, whereas others are more expansive and consider all variability as risk. The engineering definition of risk is defined as the product of the probability of an event occurring, that is viewed as undesirable, and an assessment of the expected harm from the event occurring.
Internal Fraud - misappropriation of assets, tax evasion, intentional mismarking of positions, briberyExternal Fraud - theft of information, hacking damage, third-party theft and forgeryEmployment Practices and Workplace Safety - discrimination, workers compensation, employee health and safetyClients, Products, & Business Practice - market manipulation, antitrust, improper trade, product defects, fiduciary breaches, account churningDamage to Physical Assets - natural disasters, terrorism, vandalismBusiness Disruption & Systems Failures - utility disruptions, software failures, hardware failuresExecution, Delivery, & Process Management - data entry errors, accounting errors, failed mandatory reporting, negligent loss of client assets
Investment ChoicesOur views of risk have consequences for how and where we invest. In fact, the risk aversion of an investor affects every aspect of portfolio design, from allocating across different asset classes to selecting assets within each asset class to performance evaluation.Asset allocation— Asset allocation is the first and perhaps the most important step in portfolio management, where investors determine which asset classes to invest their wealth in. The allocation of assets across different asset classes will depend on how risk averse an investor is, with less risk-averse investors generally allocating a greater proportion of their portfolios to riskier assets. Using the most general categorization of stocks, bonds, and cash as asset classes, this would imply that less risk-averse investors will have more invested in stocks than more risk-averse investors, and the most risk-averse investors will not stray far from the safest asset class, which is cash.[16][16] Cash includes savings accounts and money market accounts, where the interest rates are guaranteed and there is no or close to no risk of losing principal.Asset selection— Within each asset class, we have to choose specific assets to hold. Having decided to allocate specific proportions of a portfolio to stocks and bonds, the investor has to decide which stocks and bonds to hold. This decision is often made less complex by the existence of mutual funds of varying types, from sector funds to diversified index funds to bond funds. Investors who are less risk averse may allocate more of their equity investment to riskier stocks and funds, although they may pay a price in terms of less than complete diversification.Performance evaluation— Ultimately, our judgments on whether the investments we made in prior periods (in individual securities) delivered reasonable returns (and were therefore good investments) will depend on how we measure risk and what trade-off we demand in terms of higher returns.
Corporate FinanceJust as risk affects how we make portfolio decisions as investors, it also affects decisions that we make when running businesses. In fact, if we categorize corporate financial decisions into investment, financing and dividend decisions, the risk aversion of decision makers feeds into each of these decisions:Investment decisions— Few investments made by a business offer guaranteed returns. In fact, almost every investment comes with a full plate of risks, some of which are specific to the company and sector and some of which are macro risks. We have to decide whether to invest in these projects, given the risks and our expectations of the cash flows.Financing decisions— When determining how much debt and equity we should use in funding a business, we have to confront fundamental questions about risk and return again. Specifically, borrowing more to fund a business may increase the potential upside to equity investors but also increase the potential downside and put the firm at risk of default. The way we view this risk and its consequences will be central to how much we borrow.Dividend decisions— As the cash comes in from existing investments, we face the question of whether to return some or a lot of this cash to the owners of the business or hold on to it as a cash balance. Because one motive for holding onto cash is to meet contingencies in the future (an economic downturn, a need for new investment), how much we choose to hold as a cash balance will be determined by how we perceive the risk of these contingencies.
Chinese economic authorities were going to raise interest rates in an attempt to curb inflation and that they planned to clamp down on speculative trading with borrowed money8.8% to be exact
Investment grade
Buy this investment and you will get up to 10 percent return.
Fitch court case
Histogram – allows comparison of returns by looking at frequencyLeft tail is the worstWe can say with 95% confidence that worst daily lost won’t exceed 4%
Variance measures the variability of realized returns around anaverage level. The larger the variance the higher the risk in the portfolioCovariance essentially tells uswhether or not two securities returns are correlated.We can see how two securites interact with each other via the correlation coefficent
Symmetric, only two parameters to describe it standard deviation and meanFrom the 68-95-99.7 rule we know that for a variable with the standard normal distribution, 68% of the observations fall between -1 and 1 (within 1 standard deviation of the mean of 0), 95% fall between -2 and 2 (within 2 standard deviations of the mean) and 99.7% fall between -3 and 3 (within 3 standard deviations of the mean).This can be converted to the relative frequency 1.65, 2.33 for 95,99%
A correlation of +1 means that the returns of the two securities always move inthe same direction; they are perfectly positively correlated.• A correlation of zero means the two securities are uncorrelated and have norelationship to each other.
This can be converted to the relative frequency 1.65, 2.33 for 95% and 99% of observations
Commercial banks, for example, typically calculate a daily VAR, asking themselves how much they can lose in a day; pension funds, on the other hand, often calculate a monthly VAR.