Page 186 - DMGT513_DERIVATIVES_AND_RISK_MANAGEMENT

Unit 13: Risk Management with Derivatives II

3. Adhere to International "good practices" in respect of risk management. Notes
4. Communicate uniform and consistent definitions for measuring risk.
5. Assist in anticipating risk, thereby minimising cost and effort of reactive risk management
and improving value to shareholders.
6. Address risk management in a manner, which allows optimisation of risk-return
profile and hence contribute to improved risk-adjusted returns and optimal use of
capital.
7. Improve the understanding and interrelationships between different risks and incorporate
results in active risk management including providing economic capital for unexpected
loss (just the way credit or market portfolio risk management considers interrelationships
between constituents of the credit or market portfolio or attempts are made towards
capturing the correlations between different operational risk types) allocating economic
capital, setting risk-based limits based on risk/economic capital and controlling risk by
monitoring compliance with these limits.
8. Provide an objective mechanism for evaluating risk against business objectives, strategies
and risk tolerances.
If a bank does not take an integrated view of identifying, assessing, measuring and mitigating
risks, it could be potentially exposed to risks such as making sub-optimal business strategies
and decisions in risk-return terms or misreading the risks associated with its business strategies
and arising from its existing business composition.

Self Assessment

Fill in the blanks:
11. ………………is a discipline for dealing with the possibility that some future event will
cause harm.

12. The management of risk ………………is the key to success of any risk management effort
regardless of an organization's size or industry sector.
13. ……………. products are designed to provide their insured organizations and their brokers
with basic policy and claim information via electronic access, and most recently, via the
Internet.
14. ……………..can be defined as a system for directing and controlling the management of
risk within and across an enterprise.

15. ………….understands all bank activities and the bank's risk management activities
including rating systems and associated management reports.

13.5 Summary

 Like equity options, index options offer the investor an opportunity to either
capitalize on an expected market move or to protect holdings in the underlying
instruments.

 A stock index futures contract is a contract to buy or sell the face value of the underlying
stock index where the face value is defined as being the value of index multiplied by the
specified monetary amount.

LOVELY PROFESSIONAL UNIVERSITY 181