Foundation of Risk Management

The topics to be covered under this subject are as follows: After completion of this topic you will be able to understand

1. Risk Management

The concept of risk management
Difference between risk management & risk taking
The risk management process, identify problems and challenges that can arise in the risk management process
How to evaluate & apply tools and procedures used to measure & manage risk, including quantitative measures, qualitative assessment, and the enterprise risk management
Distinction between expected loss and unexpected loss with examples
The relation between risk and reward and how conflicts of interest can impact risk management
Difference between the key classes of risks, how each type of risk can arise, and assess the potential impact of each type of risk on an organization.

After completion of this topic you will be able to

Evaluate some advantages and disadvantages of hedging risk exposures
Explain considerations and procedures in determining a firm's risk appetite and its business objectives
Explain how a company can determine whether to hedge specific risk factors, including the role of the board of directors and the process of mapping risks
Apply appropriate methods to hedge operational and financial risks, including pricing, foreign currency, and interest rate risk
Assess the impact of risk management instruments

After completion of this topic you will be able to

Compare and contrast best practices in corporate governance with those of risk management
Assess the role and responsibilities of the board of directors in risk governance
Evaluate the relationship between a firm's risk appetite and its business strategy, including the role of incentives
Distinguish the different mechanisms for transmitting risk governance throughout an organization
illustrate the interdependence of functional units within a firm as it relates to risk management
Access the roles & responsibilities of a firm’s audit committee

After completion of this topic you will be able to

Describe enterprise risk management (ERM) and compare and contrast differing definitions of ERM
Compare the benefits and costs of ERM and describe the motivation for a firm to adopt an ERM initiative
Describe the role and responsibilities of a chief risk officer (CRO) and assess how the CRO should interact with other senior management
Distinguish between components of an ERM program

After completion of this topic you will be able to

Assess methods that banks can use to determine their optimal level of risk exposure and explain how the optimal level of risk can differ across banks.
Describe implications for a bank if it takes too little or too much risk compared to its optimal level.
Explain ways in which risk management can add or destroy value for a bank
Describe structural challenges and limitations to effective risk management, including the use of VaR in setting limits
Assess the potential impact of a bank's governance, incentive structure, and risk culture on its risk profile and its performance

After completion of this topic you will be able to

Analyze the key factors that led to and derive the lessons learned from the various risk management case studies

After completion of this topic you will be able to

Describe the key factors the led to the housing bubble
Explain the banking industry trends leading up to the liquidity squeeze and assess the triggers for the liquidity crisis
Explain how banks created collateralized debt obligations
Explain the purposes and uses of credit default swaps
Describe how securitized and structured products were used by investor groups and describe the consequences of their increased use
Describe how the financial crisis triggered a series of worldwide financial and economic consequences
Distinguish between funding liquidity and market liquidity and explain how the evaporation of liquidity can lead to a financial crisis
Analyze how an increase in counterparty credit risk can generate additional funding needs and possible systemic risk

After completion of this topic you will be able to

Distinguish between triggers and vulnerabilities that led to the financial crisis and their contributions to the crisis
Describe the main vulnerabilities of short-term debt especially repo agreements an commercial paper
Assess the consequences of the Lehman failure on the global financial markets
Describe the historical background leading to the recent financial crisis
Distinguish between the two main panic periods of the financial crisis and describe the state of the markets during each
Assess the governmental policy responses to the financial crisis and review their short-term impact
Describe the global effects of the financial crisis on firms and the real economy

After completion of this topic you will be able to

Explain how a large financial loss may not necessarily be evidence of a risk management failure
Analyze and identify instances of risk management failure
Explain how risk management failures can arise in the following areas: measurement of known risk exposures, identification of risk exposures, communication of risks and monitoring of risks
Evaluate the role of risk metrics and analyze the shortcomings of existing risk metrics

After completion of this topic you will be able to

After completion of this topic you will be able to

Calculate, compare, and evaluate the Treynor measure, the Sharpe measure, and Jensen's alpha
Compute and interpret tracking error, the information ratio, and the Sortino ratio

After completion of this topic you will be able to

Describe the inputs, including factor betas, to a multifactor model
Calculate the expected return of an asset using a single-factor and a multifactor model
Describe properties of well-diversified portfolios and explain the impact of diversification on the residual risk of a portfolio
Explain how to construct a portfolio to hedge exposure to multiple factors
Describe and apply the Fama-French three factor model in estimating asset returns

After completion of this topic you will be able to

Explain the potential benefits of having effective risk data aggregation and reporting
Describe key governance principles related to risk data aggregation and risk reporting practices
Identify the data architecture and IT infrastructure features that can contribute to effective risk data aggregation and risk reporting practices
Describe characteristics of a strong ris
Describe characteristics of effective risk reporting practices

After completion of this topic you will be able to

Describe the responsibility of each GARP member with respect to professional integrity, ethical conduct, conflicts of interest, confidentiality of information and adherence to generally accepted practices in risk management
Describe the potential consequences of violating the GARP Code of Conduct