Resource Center Home | Features | News Briefs

Risk Management Terminology

Risk management terminology can be confusing, so here's a rundown of key definitions.
By
June 26, 2000

In order to clarify some of the lingo that is thrown around in the world of risk management, WS&T called upon its sources to define some of the terms that are most widely used.

Asset Liability Management: The process of coordinating the management of an entity's assets with the management of its liabilities.

Credit Derivative: A credit derivative is a financial transaction whose payoff depends on whether or not a credit event, such as a bankruptcy, default, upgrade or downgrade, occurs. Another variation is a credit basket, where, for example, if any one of five companies defaults, it's considered a credit event.

Credit Risk: Exposure to loss relating to a change in the credit worthiness of a counterparty which may impact the counterparty's ability to fulfill its obligations under a contractual agreement.Changes in credit worthiness can be due to changes in the counterparty's credit rating or a default.

Credit risk can be divided as:

Settlement risk-which exists during the period from trade

execution to trade settlement. An example would be the

two-day settlement period for a spot foreign exchange

trade. There is a risk that the counterparty may not make

good on its obligations under the transaction.

Pre-settlement risk-risk that a counterparty does not fulfill all its

obligations under a contract, such as an interest rate swap.

Integrated Risk Management: The monitoring of credit, market and liquidity risk simultaneously.

Market Liquidity Risk: The risk that a position cannot be easily unwound or offset at the price quoted in the market due to lack of market depth or market disruption.

Market Risk: The sensitivity of the market value of a portfolio to changes in financial asset prices such as:

-Interest rates,

-Foreign exchange rates,

-Equity prices, and

-Commodity prices.

Monte Carlo Simulation: A simulation process whereby the value of a variable (e.g. equity price) is simulated over a future period of time. The simulation assumes that the variable follows a defined randomly generated process with a given drift and volatility.

Operational Risk: The risk of loss that arises from inadequate systems, controls, human error or other management failure that does not relate to strategic, market or credit activities

Risk Management: Policies and procedures for the management, monitoring and control of risk exposures.

VaR: VaR is a measure of the loss in market value of a position/portfolio, which is expected over a given holding period for a given confidence interval. The underlying premise of VaR is that the historical volatility and correlation's between different types of risk factors can be used to estimate the overall variation in the value of different and numerous cashflows.

*Sources: Richard Houston, Financial Risk Management, Arthur Andersen; Richard Tanenbaum, president of Savvysoft Corp.; and Chuck Jones and Michael Bishop, product managers at BARRA.

Printer Friendly

Like this article? Sign up for Wall Street & Technology's daily e-mail newsletter to get more news and analysis delivered right to your in-box.

logon-to-comment

Quick View

Full View

0 Comments

Resource Center Home | Features | News Briefs

This section requires Flash player 8 or higher.
If you wish to get the latest version of Flash player, please download it here.

Offshore Vendor Security[mp3]
Paul Dunay Director of Global Field Marketing speaks with Hitesh Anklesaria a Senior Manager in BearingPoint's Infrastructure solutions group as well as a CISSP, CISA.

Enterprise Governance[mp3]
Paul Dunay Director of Global Field Marketing speaks with Louis Anon a Senior Manager in BearingPoint's Financial Services group.

Basel II and Sarbanes Oxley: Convergence or Collision[mp3]
Paul Dunay, Director of Global Field Marketing speaks with Sandeep Vishnu a Director in the Enterprise Risk Management group.

Offshoring risk: Portfolio treatment and the role of operational risk
Offshoring offers financial services organizations attractive cost, efficiency and performance benefits, but it also introduces a wide array of risks. BearingPoint examines the importance of risk management in establishing and maintaining an effective offshoring operation.

Enterprise Risk Portfolio Management
Financial institutions have initiated a multitude of risk and compliance projects in recent years in response to Basel II, the Sarbanes-Oxley Act and other requirements.

Nine Pitfalls of Compliance Program Implementation
Financial institutions have invested heavily to comply with the numerous laws and regulations now governing the business world. Even the most sophisticated compliance systems and processes, however, can be rendered ineffective if your firm focuses on the wrong metrics, underestimates the extent of the requirements or fails to get the right people involved.

Basel II and Sarbanes-Oxley: Convergence or collision? Implementing an integrated approach
The Sarbanes-Oxley Act of 2002 has attracted the lion’s share of risk management effort and resources over the last three years for public companies operating in the United States. Yet it is by no means the only major regulatory change affecting financial institutions.

Integrating Sarbanes-Oxley Controls Into Your Corporate Governance Framework
Many companies have established separate governance procedures for Sarbanes-Oxley controls, believing that financial reporting risks are somehow different from other business risks. This lack of a direct connection between policies and procedures means that companies have no assurance that controls are working and that the risk is being effectively managed.

Scenario analysis for Basel II operational risk management
Financial institutions have always recognized the importance of safeguarding customer data. Several recent events in the market place have become significant due to never-before-seen levels of regulatory fines and litigation expenses...

Basel II Operational Risks - Avoiding the seven pitfalls in Basel II operational risk implementation
The Basel II Capital Accord is compelling large, internationally active banks to see operational risk in a new, brighter light. By formally introducing operational risk into risk management and capital calculation, Basel II is moving these institutions to explicitly identify, measure and report information related to operational risk. Many smaller banks and non-bank financial institutions are following suit.

A New Paradigm in Enterprise Governance
Passing Sarbanes-Oxley review signifies only that your firm has implemented internal controls for financial reporting. It does not mean that your organization’s governance model is adequate to the task of maintaining and modifying those controls as needed.