BWIN611 Quantitative Risk Analysis - Seminar 14 Flashcards

This flashcard set covers the vocabulary and key conceptual definitions from Seminar 14, Part 1 of Quantitative Risk Analysis, including definitions of risk, ERM, regulatory frameworks, and market risk categorization.

Risk (McNeil et al. 2015)

Any event or action that may adversely affect an organisation’s ability to achieve its objectives and execute its strategies or the quantifiable likelihood of loss or less-than-expected returns.

Risk Management

The process of identifying risks faced by an organisation, assessing the likelihood and impact of those risks, and deciding how to deal with them (keep, remove, reduce, or transfer) to optimise risk adjusted returns.

Enterprise Risk Management (ERM)

The discipline by which an organisation in any industry assesses, controls, exploits, finances and monitors risk from all sources for the purpose of increasing the organisation’s short and long-term value to its stakeholders.

Modigliani-Miller Theorem (MMT)

A theorem stating that a company’s financial structure does not affect its value in an ideal world where there are no taxes, bankruptcy costs, or asymmetries of information, and where capital markets are arbitrage-free.

Economic Capital

The amount of capital a firm needs to hold to remain solvent and cover unexpected losses at a given confidence level over a specified time horizon; considered the best-practice measure of risk.

Risk Appetite

How much ‘risk’ an enterprise can afford to take or not to take and how this can be measured.

Risk Profile

How much risk an organisation takes and how this is changing over time.

Exposure

A risk concept which asks: "What do I stand to lose?"

Probability

A risk concept which asks: "How likely is it that some event will actually occur?"

Severity

A risk concept which asks: "How bad might it get?"

Volatility

A risk concept which asks: "How uncertain is the future?"

Time horizon

A risk concept which asks: "How long will I be exposed to the risk?"

Correlation

A risk concept which asks: "How are the risks in my business related to each other?"

Capital

Defined as assets less liabilities, owners’ equity, or net worth; used to support the riskiness of operations and firm solvency.

Capital Management

The process of determining the need for and adequacy of capital, along with plans for increasing or releasing capital and strategies for its efficient use.

Basel I Accord (1989)

A regulatory framework that placed an emphasis on credit Risk.

Market risk (Banks)

Risk that is controlled and limited because losses can threaten solvency, involving management of trading-book risk and interest-rate risk under strict regulatory capital rules.

Market risk (Non-financial firms)

Risk faced incidentally (FX, interest rates, commodities) and managed primarily via hedging to stabilise cash flows and protect operations.

Basel II.5 Accord (2009)

Proposed enhancements and the inclusion of operational risk within the regulatory framework.

Basel III Accord

Consultations started in 2011 with post-crisis reforms completed in 2017.