Financial Risk Management Chapter 24. Daniel HERLEMONT ... methods to measure and manage market and credit risk. â The industry is turning next to operational risk which has proved to be an ... Causal Networks. â Actuarial models ...
Following P. Jorion, Financial Risk Management Chapter 24
Daniel HERLEMONT
Introduction By now, the financial industry has developed standard methods to measure and manage market and credit risk. The industry is turning next to operational risk which has proved to be an important cause of financial losses. Indeed, most financial disasters can be attributed to a combination of exposure to market or credit risks along with some failure of controls that is a form of operational risk For the first time, the Basle Committee is proposing to establish capital charges for operational risks, that is about 20% of of the overall capital requirements Problem: operational risk is much harder to identify than market and credit risks. Even, the definition of opertional risk is still vague ... Daniel HERLEMONT
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Importance of operational risk - case histories
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Breakdown of Financial Risks
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Examples of Operational Risks
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Definition of Operational Risk There are still no consensus on exact definition the broadest operational risk is any financial other than market and credit risk. too broad, include also business risk, ...
the narrowest operational risk as risk arising from operations. includes back office problems, failure in transactions and systems, ... but does not include internal fraud, improper sales practices, ...
Intermediate definition the risk of direct of indirect loss resulting from inadequate or failed internal process, people or systems or from external events. exclude business risk, strategic and reputational risks. but include external events such as external fraud, regulatory effects, natural disasters legal risks, ... It is now the Basle II definition ... Daniel HERLEMONT
Operational Risk Classifications
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Model Risk Among operational risk, a notable risk for complex products is Model Risk which is due to using the wrong models for valuing and hedging products Internal risks that combines lack of knowledge (people) product complexitiy valuation errors programming errors
Examples: March 1997, Bank Tokio/Mitsubishi $83 million loss due to overvaluing swaps and options 1997, NatWest, £50 millions loss due to misspricing in swaptions
Currently under active research (Rama Cont) worst case approaches Daniel HERLEMONT
Model Risk
Input Risk
Estimation Risk
Model Risk (valuation)
Deal Database
Market Database
Statistical Tools
Model 1
Vendors of parameters
Model n
Model N
Model Calibration Deal Valuation
Hedging Risk
Hedging Models
source Crouhy-Galai-Mark
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FRM questions
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FRM questions
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FRM questions
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Approaches to Operational Risks Models Top Down Bottom up
Managing Operational Risks Like market VAR, the distirbution of operational losses can be used to estimate exptected losses as well as the amount of capital required
Daniel HERLEMONT
Regulatory requirements The new Basle Accord introduce charge against operational risk (www.bis.org/publ/bcbsca07.df) 3 Methods Basic Indicator Method Standardized approach Internal measurement approach (IMA)
calibration still in development stage ...
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Preventing Operational Risk Straight Through Processing (STP) Internal control: clear separation of functions dual entries Reconciliations Tickler Systems Confirmations Verification of prices Authorization Settlement Internal / External Audits Daniel HERLEMONT
X. nD1. Xi n. (1) where Li is the aggregate loss of cell number i, Ni is the number of events over ... changes: the average value over all cells and confidence intervals is equal to .... exponential function of a normal random variable that is a line
Mar 21, 2014 - This suggests that an optimal buffer would make the VaR forecast more robust. However, it is not trivial to calculate the buffer, after all, the ... capital charge calibrated on the backtesting framework of the regulators. .... weight
Is that man in bad company? (or in love with Ida). Man-at-the-end WITH - WITHOUT full ... Worst case scenario. Deplete your own resources ... Limited resources: ...
This device complies with Part 15 of FCC Rules and Industry Canada license-exempt ... compliance could void the user's authority to operate the equipment.
will be available for download from (see section IC OpAmps): http://www.sg-acoustics.ch/analogue audio/. The reader will note that there are various amplifiers ...
electrical characteristics, VCC± = ±15 V ...... safeguards should be provided by the customer to minimize inherent or procedural hazards. TI assumes no liability ...
December 1994. LM725 Operational Amplifier. General Description. The LM725 LM725A LM725C are operational amplifiers featuring superior performance in ...
ï¼Operating manualï¼. In power off mode (1), this production enters Search mode for new device(2) or Search mode for paired device (3) with buttonâ long press.
guaranteed over a 0ËC to 70ËC temperature range. Features n High open loop gain. 3,000,000 n Low input voltage drift 0.6 µV/ËC n High common mode rejection ...
development, and increase profits â rather than using risk analysis to promote status ..... fire codes; boiler testing and inspection; and safety engineering on steamboats, ...... A hospital administrator, whose responsibility is to provide emer- .
will be available for download from (see section IC OpAmps): http://www.sg-acoustics.ch/analogue audio/. The reader will note that there are various amplifiers ...
Oct 17, 2005 - ... of risk by different contracts and next, some risks such as war, floods, earthquakes, ... In order to get significant results for such a huge class of.
A performance issue. â«. Weak and correlated performance. â«. Limited number of strategies. â«. Small capacity wrt performance impact. Poor liquidity.
Risk analysis and risk management are, for most people, much more lofty and ... staff to help devise better laws to protect the public, encourage responsible ...... Therefore, event trees are useful for facilitating communication about the assump-.
Swap: the reference is a reference pool (usually between 5 and 10 reference entities) ..... The CRM is a risk metrics that, as the IRC, captures the risks due to.
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n Hand-held Analytic Instruments n Medical ...... s Registered or combinatorial operation s Registers .... combinatorial is selected, the output will be a function of.
obtained by replacing h by h/2, where it must then be assumed that the wave packet is ..... could also be constructed on the basis of the opposite assumption). .... TRAPPED FLUCTUONS AND INHERITANCE OF MASS. The mass ..... The key idea is that the va
