FRM笔记 book1 chapter 1
What does risk manage do ?
Have ability to price the risks and provide adequate compensation for the risk taken in.
What is risk and Uncertainty ?
Risk is the variablilty that can be quantified in terms of probabilities.
Uncertainty is the variability that vannot be quantified at all.
To manage the RISKs, first you need group the risk by Types.Then use the right tool to handle the risk.
Each type of risk need different skills to manage it.
What is market risk ?
Market risk is the potential reduction in value of a portfolio or a security due to changes in financial market price and rates.
Market risk(Price Risk) inculde general market risk (economic info) and specific market risk(firm specific info)
Systematic risk is not affected by diversification.
Idiosyncratie or specific risk in the firm specific risk wihch is unsystematic risk which able to virtually eliminated by diversification.
Market Risk Classification
1.Equity price risk - Volatility in the stock prices.
2.Interest rate risk - Fluctuations in the market interest rates.
3. Currency risk - exchange rate risks.
4. Commodity price risk - price of commodities
What is Credit Risk?
Classification: 1. Downgrade Risk(credit rating, recent Westpac case) or 2. Bankruptcy Risk (inability to clear the debt)
Key Issues:
Creditworthiness
Concentration risk(diversification of the obligor)
State of the econcomy (econcomy cycle, bull or beer market)
What is Liquidity Risk?
Is the risk that a firm maybe unable to meet short-term financial needs.
Classification 1. Funding liquidity Risk2. Trading liquidity Risk
What is Operational risk?
it is tthe risk taht arises due to operational weaknesses.(failure management, faulty controls, in adequate systems)
Classification 1. AML 2. Cyber risk 3. Model risk
What is Business Strategic and Reputation risk?
Classification 1. Business risk - uncertationties in demands,the cost of production and cost of delicery etc.
2 Strategic risk , risk of significant investments for which the uncertainty of success and profitability is high.
3. Reputation risk , settle the obligation to counterparties and creditors , etthical practice
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Interactions of risk types
Risk can flow from one type to another.
such as during GFC 07-09, Credit risk - liquidity risk - market risk
Methods of risk management
Avoiding 规避风险
Retaining or keeping the risk 接受风险
Mitigation of the risk 减少 风险暴露
Transfer risk 转嫁风险，购买衍生品 对冲风险。
Expected Loss （EL）
The expected loss can be defined as the mean loss an investor might expect to experience from a portfolio.
PD , 出现违约的可能性 %
LGD , 违约的损失率 %
EAD, 风险暴露 总量 $
RAROC = Reward/ Risk = ER after tax / Economic Capital
if the RAROC is higher than the cost of equity capital.then the portfolio is valuable to the investor.
