Best practices for firm wide management of financial risks. â due to number of ... systems and data ... if the trader loses money, he is simply fired (in many cases ...
Firm Wide Risk Management Following P. Jorion, Financial Risk Management Chapter 27
Daniel HERLEMONT
Introduction Best practices for firm wide management of financial risks due to number of factors increase exposure to more global source of risks as institutions becomes more global interaction between risks factors linkage in products across markets
Danger of ignoring linkage: move risk to areas where it is not well measured or controled The industry recognize also the benefit of diversification effects Trend toward integrated or firm wide risk management Daniel HERLEMONT
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Review of financial risks
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Integrated Risk Management
Integrated Risk Management provides a consistent and global picture of risk across the whole institution
This requires measuring risk across all business units, all factors, using consistent methodologies, systems and data
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The Three Pillar Frame work Best Practices Policies
Best Practices Methodologies
Best Practices Infrastructure
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Organizational Structure - The old Style
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Organizational Structure - The modern style
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The Middle Office - Chief Risk Officer Establishing risk management policies, methodologies and procedures consistent with firm wide policies Reviewing risk on a global basis as well as monitoring exposures and movements in risk factors Enforcing risk limits with traders Communicating risk management results to senior management
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Centralized Risk Management
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Controlling Traders Trader Compensation (incentive fees) provides an option like remuneration if the trader is successful, he can become a millionaire at a very young age if the trader loses money, he is simply fired (in many cases, the trader will find another employment ...)
The trader who is long in "option" has an incentive to increase the value of his option by increasing the risk of the positions .. this may not be the best interest of the company
Daniel HERLEMONT
Controlling Traders Trader risk taking can be controlled by modifying the structure of the compensation contract to align the interests of the trader and the company better (e.g. by paying with company stock or tying compensation on long term performance, in case of hedge Fund, the trader should have a significant part of its wealth invested in the fund) by substracting risk based capital charge from trading profits as in a RAROC type system by appointing an independent risk manager
To be effective, it is essential that the compensation structure of risk managers be independent of how well traders will perform unless risk managers participate also in risk adjusted optimization processes of the strategy
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Trader Limits Stop Loss limits restrictions on traders positions that are imposed after loses prevent the trader to take bigger bets in the hope of future gain to wipe out previous loses.
Exposure Limits VAR Limits are now becoming a common limit potential drawback: VAR limit is affected by volatilities and how they are determined. Volatility may have spikes and VAR limits may be violated Daniel HERLEMONT
VaR is complemented by Stress Testing which identifies potential losses under extreme market conditions. YATS. Market Risk model also implements Extreme ...
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Financial Risk Management. Forecasting Risks and Correlations. Following P. Jorion, Value at Risk, McGraw-Hill. Chapter 8. Daniel HERLEMONT. Volatility.
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quotidiennes du département. Principales responsabilités : •. Supporter l'équipe dans le processus de renouvellement des différents programmes d'assurance;. •. Effectuer une variété de tâches techniques et administratives liées à la gestion des risqu
