Risk Management

Abstract

Even though risk management is the quality control of finance to ensure the smooth functioning of the business model and the corporate model, this chapter takes a more focused approach to risk management. We begin by describing the methods to calculate risk measures. We then describe how these risk measures may be reported. Reporting provides feedback to the identification and measurements of risks. Reporting enables the risk management to monitor the enterprise risk exposures so that the firm has a built-in, self-correcting procedure that enables the enterprise to improve and adapt to changes. In other words, risk management is concerned with four different phases, which are risk measurement, risk reporting, risk monitoring, and risk management in a narrow sense. We focus on risk measurement by taking a numerical example. We explain three different methodologies for that purpose, and examine whether the measured risk is appropriate based on observed market data.

This chapter is from THE OXFORD GUIDE TO FINANCIAL MODELING: APPLICATIONS FOR CAPITAL MARKETS, CORPORATE FINANCE, RISK MANAGEMENT, AND FINANCIAL INSTITUTIONS by Thomas Ho and Sang Bin Lee, copyright © 2004 by Thomas S.Y. Ho and Sang Bin Lee. Used with permission of Oxford University Press, Inc.