Risk Management Flashcards

1
Q

Enterprise risk management (ERM)

A

A firmwide or across-enterprise perspective on risk

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2
Q

Corporate governance

A

The system of internal controls and procedures used to manage individual companies

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3
Q

Risk management versus corporate governance

A

Risk management incorporates a centralized type of risk management called “enterprise risk management” (ERM). ERM’s distinguishing feature is a firmwide or across-enterprise perspective. The corporate governance structure is much broader than risk governance and encompasses the system of internal controls and procedures used to manage individual companies.

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4
Q

The risk management process

A
  1. Set policies and procedures
  2. Define risk tolerance
  3. Identify risks
  4. Measure risks
  5. Adjust the level of risk
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5
Q

Straight-through processing (STP)

A

Systems that obviate manual and/or duplicative intervention in the process from trade placement to settlement

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6
Q

Market risk

A

Is the risk associated with interest rates, exchange rates, stock prices, and commodity prices

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7
Q

Credit risk

A

Is the risk of loss caused by a counterparty or debtor’s failure to make a promised payment

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8
Q

Liquidity risk

A

Is the risk that a financial instrument cannot be purchased or sold without a significant concession in price because of the market’s potential inability to efficiently accommodate the desired trading size

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9
Q

Operational risk

A

Is the risk of loss from failures in a company’s systems and procedures or from external events

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10
Q

Model risk

A

Is the risk that a model is incorrect or misapplied; in investments, it often refers to valuation models

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11
Q

Settlement (Herstatt) risk

A

Is the risk that one party could be in the process of paying the counterparty while the counterparty is declaring bankruptcy

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12
Q

Regulatory risk

A

Is the risk associated with the uncertainty of how a transaction will be regulated or with the potential for regulations to change

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13
Q

Legal/contract risk

A

Is the possibility of loss arising from the legal system’s failure to enforce a contract in which an enterprise has a financial stake

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14
Q

Tax risk

A

Is the risk associated with uncertainty associated with tax laws

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15
Q

Accounting risk

A

Arises from uncertainty about how a transaction should be recorded and the potential for accounting rules and regulations to change

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16
Q

Sovereign risk

A

Is a form of credit risk in which the borrower is the government of a sovereign nation

17
Q

Political risk

A

Is associated with changes in the political environment

18
Q

Value at risk (VaR)

A

Is an estimate of the loss (in money terms) that we expect to be exceeded with a given level of probability over a specified time period

19
Q

The expected return μP and variance σ2P of a combined position

A
20
Q

Normal distribution key levels

A
  • 5% = 1.65
  • 1% = 2.33
21
Q

Surplus at risk

A

VaR as it applies to pension fund suplus

22
Q

Incremental VaR (IVaR)

A

Measures the incremental effect of an asset on the VaR of a portfolio by measuring the difference between the portfolio’s VaR while including a specified asset and the portfolio’s VaR with that asset eliminated

23
Q

Marginal Value at risk (MVaR)

A

MVaR reflects the effect of a very small change in the position size. In a diversified portfolio, marginal VaR may be used to determine the contribution of each asset to the overall VaR

24
Q

Cash flow at risk (CFAR) and Earnings at risk (EAR)

A
  • CFAR is the minimum cash flow loss that we expect to be exceeded with a given probability over a specified time period
  • EAR is defined analogously to CFAR but measures risk to accounting earnings
25
Q

Tail value at risk (TVaR)

A

Is defined as the VaR plus the expected loss in excess of VaR, when such excess loss occurs

26
Q

Factor push

A

Stressing model that pushes the prices and risk factors of an underlying model in the most disadvantageous way and to work out the combined effect on the portfolio’s value

27
Q

Maximum loss optimization

A

Stressing model in which we would try to optimize mathematically the risk variable that will produce the maximum loss

28
Q

Worst-case scenario analysis

A

Stressing model in which we can examine the worst case that we actually expect to occur

29
Q

Cross-default provision

A

Provision that stipulates that if a borrower defaults on any outstanding credit obligations, the borrower is in default on them all

30
Q

Credit VaR

A

Reflects the minimum loss with a given probability during a period of time from gains on market positions held

31
Q

Closeout netting

A

In a bankruptcy, a process by which multiple obligations between two counterparties are consolidated into a single overall value owed by one of the counterparties to the other

32
Q

Enhanced derivatives products companies

A

A type of subsidiary separate from an entity’s other activities and not liable for the parent’s debts. They are often used by derivatives dealers to control exposure to ratings downgrades. Also called special purpose vehicles

33
Q

Total return swap

A

A swap contract that involves a series of exchanges of the total return on a specified asset or equity index in return for specified fixed or floating rate payments

34
Q

Credit spread option

A

An option based on the yield spread between two securities that is used to transfer credit risk

35
Q

Risk-Adjusted Return on Capital (RAROC)

A

Divides the expected return on an investment by a measure of capital at risk, a measure of the investment’s risk that can take a number of different forms

36
Q

Return over Maximum Drawdown (RoMAD)

A

The average return in a given year that a portfolio generates, expressed as a percentage of this drawdown figure

37
Q

Credit risk for options

A

Is born only by the buyer and the amount is equal to the option’s current price

38
Q

Tool used to manage contagion in times of crisis

A

Conditionnal correlation matrices. One set of correlation for normal conditions and one set for crisis conditions