ORM Assignment

HullRMFI5eCh29.pptx

Chapter 29

Risk Management Mistakes to Avoid

Big Losses (Business Snapshot 29.1, pages 644–645)

Allied Irish Bank ($700 million)

Barings ($1 billion)

Enron’s Counterparties ($ billions in lawsuits)

Hammersmith and Fulham ($600 million)

Kidder Peabody ($350 million)

LTCM ($4 billion)

National Westminster Bank ($130 million)

Orange County ($2 billion)

Procter & Gamble ($90 million)

Soc Gen ($7 billion)

Subprime mortgage losses ($ tens of billions)

UBS ($2.3 billion)

Risk Limits (pages 643–645)

Risk must be quantified and risk limits set

Exceeding risk limits is not acceptable even when profits result

Do not assume that you can outguess the market

Be diversified

Scenario analysis and stress testing is important

Managing the Trading Room (pages 647–649)

Do not give too much independence to star traders

Separate the front, middle, and back office

Do not blindly trust models

Be conservative in recognizing inception profits

Do not sell clients inappropriate products

Beware of easy profits

Liquidity Risk (pages 649–651)

The credit crisis of 2007 has emphasized the importance of liquidity risk

Need to ensure that liquidity funding needs can be met in stressed market conditions

Beware when many are following the same strategy

Do not make excessive use of short-term borrowings for long-term needs

Market transparency is important

Lessons for Nonfinancial Corporations (pages 651–653)

It is important to fully understand the products you trade

Beware of hedgers becoming speculators

It can be dangerous to make the Treasurer’s department a profit center

A Final Point (pages 653–654)

Three types of risk

Known

Unknown

Unknowable

Flexibility is important