Risk Management Essay

5224 words - 21 pages

Table of ContentPagesExecutive Summary 04Veiling Some Concepts regarding Risk 05Why Should Firms Manage Risk? 06An Example of Merrill Lynch 07The Aims/Objectives of Risk Management 09The Current Economic Downturn 14Current RBS Failure and Risk Management 15Recommendations 17Conclusions 18References 19Executive SummaryAs per a Chinese Proverb,A smart man learns from his own mistakes,A wise man learns from the mistakes of others,And a fool never learnsFrom the last decade risk management is the most researched and exciting area in the financial industry as it elaborates how to minimize and avert the hazard of risk from the portfolios of different assets and from the operations of financial ...view middle of the document...

I will provide a list of recommendations to overhaul on the problems. I have included one old and one new example of the default of the industries, one is of Merrill Lynch and my second example is Royal Bank of Scotland.Veiling Some Concepts regarding RiskRisk, which we define as the uncertainty surrounding the outcome of an event, is an integral and inevitable part of business. Companies and governments operating in the complex economic environment of the 21st century must contend with a broad range of risks. Some do so in an adhoc or reactive fashion, responding to risks as they appear, whilst others are proactive, planning in advance the risks that they wish to assume and how they can best manage them. Since it has become clear over the past few years that risk can be financially damaging when neglected, anecdotal and empirical evidence suggests that institutions increasingly opt for formalized processes to manage uncertainties that can lead to losses. Risk can be classified in a number of ways and though we do not intend to present a detailed taxonomy of risk, a brief overview is useful in order to frame my discussion. To begin, risk can be divided broadly into financial risk and operating risk. Financial risk is the risk of loss arising from the movement of a market or performance of a counterparty and can be segregated into market risk (the risk of loss due to movement in market references, such as interest rates, stock prices or currency rates), liquidity risk (the risk of loss due to an inability to obtain unsecured funding or sell assets in order to make payments) and credit risk (the risk of loss due to non-performance by a counterparty on its contractual obligations). A rise in funding costs, an inability to sell financial assets at carrying value or the default by a counterparty on a loan are examples of financial risks. Operating risk, in contrast, is the risk of loss arising from events that impact non-financial business inputs, outputs and processes. Lack of electricity needed to power assembly lines, collapse of a computer network, disruptions in the sourcing of raw materials or misdirection of payments or orders are examples of operating risks. Risk can also be classified in the pure or speculative form. Pure risk is any exposure that results either in a loss or in no loss, but can never generate a gain; speculative risk is an exposure that can result in a gain, a loss, or no loss. In general, operating risks are often pure risks (e.g. if an assembly line fails to function as expected loss results and if it functions as it should no loss occurs), while financial risks are often speculative risks (e.g. if interest rates rise the cost of funding rises and a loss occurs, if interest rates decline the cost of funding declines and a saving or 'gain,' results). Risk can also be classified by frequency and severity. Though the specter of risk is present in virtually all business activities, the frequency of occurrence can vary widely....

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