Risk Management Study Questions

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12. List three (3) risks to OSU's brand and/or reputation. For each risk, discuss a method that the CRO can use to assess the risk. (homework due 9/18) you will be graded on reasonableness of answer***

supervised: establishes a dependent variable unsupervised: no dependent variable

26.Explain the main difference(s) between supervised and unsupervised machine learning.

Strict laws or policies that would provide punishment to these employees. Putting together a policy handbook to lay out rules.

A firm has identified that employee fraud is a risk that the firm does not want to take. Discuss one (1) ERM strategy that the firm can use to avoid taking this risk.

there is a 5% chance that you will lose at least 5000 (.05 x 100000) over a one month period

A fund manager announces that the one-month Value-at-Risk (VaR) at the 95% confidence level is 5% of the size of the portfolio being managed. You have an investment of $100,000 in the fund. How do you interpret the portfolio manager's announcement?

i. Time Horizon (number of categories) ii. Likelihood Scale (frequency and probability) iii. Impact Scale (unit of focus, relative to budgeted cash flows) iv. Risk Rating Scale (high medium or low, and each action you undertake) "low means status quo, high call ceo" v. Define appropriate action

A jewelry manufacturer has identified gold price volatility as a key risk associated with the drivers of firm value. Outline the steps you would undertake to assess this risk using the following risk assessment methods: Probability-Impact Matrix:

i. Identify major risk factors affecting firm's cash flow ii. Relate exposures to risk factors iii. Forecast expected risk factors to get probability. Distribute & simulate risk factor scenarios iv. Calc fin results & CF under each risk factor scenario v. Est CFaR

A jewelry manufacturer has identified gold price volatility as a key risk associated with the drivers of firm value. Outline the steps you would undertake to assess this risk using the following risk assessment methods: Cash Flow at Risk

Way of analyzing with changing combination or number of assumptions Number of assumptions, how are you changing those assumptions, see the outcome

A jewelry manufacturer has identified gold price volatility as a key risk associated with the drivers of firm value. Outline the steps you would undertake to assess this risk using the following risk assessment methods: Scenario Analysis

Do you want to use dashboard, or owner of the risk, or where do we stand Knowing the audience: knowing what board would want to hear vs marketing etc. Details on underlying dashboards, which way they are trending (going up or down)

A risk manager is preparing a presentation to the Board of Directors of the firm about the key risks facing the firm. The goal of the presentation is to assist the Board of Directors to monitor and act accordingly. Describe the 1) type, 2) content and 3) type of reports/visuals you would use.

Mean: 0, 95% = -1.645 Multiply by 2% of 300 million 0 - (1.645 x 6) = -$9.87 million

Assume that the return of a portfolio over a one-day period is normally distributed with a mean of zero and a standard deviation of 2.0%. The value of the portfolio is $300 million. What is the one-day VaR at the 95% confidence level?

Hedge ratio: to determine the amount between spot and forward price Forward: you may be able to do a partial Number of contracts x size of contract = position size Hedge ratio: is the slope. The higher the square the more correlated

Assume the size of one gold forward contract is 1,000 troy ounces, explain how you determine the size of the forward position that the firm should undertake to hedge its gold and silver price exposures.

Risk appetite: strategic statement- what aligns with company Risk tolerance: tactical and operational statement (incentives, behavior) To figure out how to minimize risk and find opportunity to increase firm value

Briefly explain how a firm can integrate its risk appetite and risk tolerances into strategic decisions, planning, and processes.

Advantages: less probability of big loss and you can quantify it Disadvantages: doesn't look at the upside, and measured with some error, doesn't take into consideration "not normal" market conditions. Doesn't apply to derivatives, assumes the past is like the future (you can change this by changing weighting)

Discuss the two (2) advantages and two (2) disadvantages using Value-at-Risk analysis.

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Explain (not list) the main steps involved in constructing a P-I matrix

Qualitative: more appropriate for non financial risk. This is more subjective Quantitative: coming from a model or statistics

Explain one way in which qualitative risk assessment differs from quantitative risk assessment and provide an example of a type of risk you would use a qualitative risk assessment technique to evaluate

Each technique is imperfect. Using them together may provide insights

Explain why a firm might consider supplementing Cash-Flow-at-Risk measures with another risk assessment method such as Stress Testing or Scenario Analysis.

How quickly they trade. They tend to trade quickly so we want it to be a daily frequency

Explain why a trading desk may choose to use a one-day VaR while pension fund may choose to use a one-month VaR

There's a 1% chance at losing $40million on any given day

For year- end 2016, the bank reported that the average one-day Value-at-Risk (VaR) at the 99% confidence level was $40 million for the CIB unit. How do you interpret CIB's one-day VaR at the 99% confidence level?

Digital application may be web based, how employees are using it (less engaged) Work balance, maybe you have to worry about fraud

Given the roles of technology and digital applications, discuss two (2) potential risks related to talent.

Put them into a dashboard, decide which risks are key risks, and how they will approach the risks. Limited budget: have to prioritize and figure out how to manage. Strategically monitor and put together a dashboard

How would you reply to the following question, "What should the board and senior management do with the risk assessments after the key risks facing the firm have been assessed?"

1. Impact of potential future event 2. Likelihood it will occur 3. Velocity of potential future event (speed) 4. Vulnerability of firm to potential event (how prepared)

Name the four (4) main questions a risk assessment should aim to answer.

Cyber hacking: lots of individual private information Property: due to vandalism

Operational opportunities and risks are present in all organizations. Discuss two types of operational risks related to processes that OSU potentially faces and how OSU can assess these risks.

Model distribution of the currency (forecast it) Relate it to other currencies via regression Look at your CFaRisk

Senior management has identified two key risk exposures to Nordstrom: 1) currency risk and 2) customer demand uncertainty. a. Outline the steps you would undertake to assess the firm's currency risk exposure using Cash-Flow-at-Risk as the risk assessment method.

B

Stock A has an expected return of 18.3% and a standard deviation of 15%. Stock B has an expected return of 12.6% and a standard deviation of 22%. a. Stock A is riskier stock than Stock B because it has a higher expected return. b. Stock B riskier stock than Stock A because its volatility is higher. c. Stock A is a riskier stock than Stock B because its volatility is higher. d. Stock A and Stock B are equally risky.

Mean - (1.645 x volatility) = -$3.29 million 0 - (1.645 x 2 million)

Suppose that the change in the value of a portfolio over a one-day period follows a normal distribution with a mean of zero and a standard deviation of $2 million. What is the following: The one-day VaR at the 95% confidence level

Mean - (2.326 x volatility) x sqrt(5) 0 - (2.326 x 2)(sq rt of 5) = -$10.4 million

Suppose that the change in the value of a portfolio over a one-day period follows a normal distribution with a mean of zero and a standard deviation of $2 million. What is the following: The 5 day VaR at the 99% confidence level?

Mean - (1.645 x volatility) 0 - (1.645 x (2)(sq rt of 5)) = -$7.356 million

Suppose that the change in the value of a portfolio over a one-day period follows a normal distribution with a mean of zero and a standard deviation of $2 million. What is the following: The five day VaR at the 95% confidence level

Might use a forward, option, future Might have a lot of cash on hand

The CEO is concerned about gold price and silver price variability. Gold costs represent about 35% of operating expenses each year while silver costs represent about 18% of operating expenses. Discuss two (2) ERM strategies that the firm might consider using to manage its commodity (gold and silver) price exposure.

Long forward, He is looking to buy. Looking for price to go up, when it goes up his investment pays off

The CRO recommends that the firm use over-the-counter(OTC) gold forward contracts to hedge both gold price and silver price variability. He wants to hedge the purchase of 25,000 troy ounces of gold and 22,500 troy ounces of silver. Given his recommendation; i. Should the firm enter into a long or short forward contract? Explain your choice or no credit will be given.

Talent recruitment strategies: Capitalize on data analytics HR policies to retain talent: e.g., work-life balance policies Have them focus on why they are leaving work, maybe it is boring/challenging Send out surveys (employee satisfaction); maybe it's the salaries (look at avg)

The Chief Talent Officer at the firm has asked you to help with understanding why the firm cannot retain key employees. Explain how you would approach this problem using insights that you gained about the ERM framework.

Predictive, so the question is false. What is described is predictive analytics

True or false. Diagnostic data analytics typically involves statistical analysis of historical data to forecast future activity. If the statement is true, explain why. If the statement is false, explain why.

False. It says you will lose at least, but does not describe what you will lose

True, false, explain. Value-at-risk describes the losses in the left tail. If the statement is true, explain why. If the statement is false, explain why.

False. Expected shortfall tells you if you are in the tail, expect to lose on average 26%

True, false. The one-day 95% Expected Shortfall (ES) for a portfolio is -26%. Thus, there is a 5% probability that the portfolio manager can expected to lose at least 26% of the value of the portfolio over a given day. If the statement is true, explain why. If the statement is false, explain why.

typical

VaR summarizes downside risk under ______ market conditions

1. Associated Costs 2. Current Risks and opportunities impacted by undertaking opportunity How it will interact with other parts of the firm

What two items does a risk manager need to understand to evaluate a firm's total risk level?

1. Identify major risk factors affecting firm's cash flow 2. Relate exposures to risk factors 3. Forecast expected risk factors to get prob. 4. Dist. & simulate risk factor scenarios 5. Calc fin results & CF under each risk factor scenario 6. Est earnings at risk

Your boss asks you to perform an earnings-at-risk assessment to examine the impact of US$-UK £ exchange rate uncertainty. Outline the steps that you would undertake to do this type of assessment

Pick time horizon (quarter, year) Focus on income, cash flow (unit of focus) Upside and downside: look at impact on CF if consumer demand is 5% above avg, below, 30% above/below Likelihood scale: 3 categories (as expected, more than expected, below 25%) Risk Ratings: High, medium, low Define the action

b. Outline the steps you would undertake to assess the firm's exposure to customer demand uncertainty using a Probability-Impact Matrix as the risk assessment method.

stress testing under non normal market conditions because VaR is only normal method

b. Since no single measure can reflect all aspects of market risk, briefly discuss one (1) other risk assessment technique that the bank can use to evaluate market risk exposure of the CIB's business activities.

Deal with counterparty risk. This is the risk that the counterparty will default

d. If the firm hedges its gold and silver prices exposures using gold forward contracts with an OTC derivatives dealer, what risks does the firm face?

insurance, derivatives

firms can use _________ to transfer a risk to another party willing to bear the risk

operational

flexible manufacturing is an example of _________ hedging

Basis risk. Gold is not silver, the price moves differently

ii. What type of risks, if any, does the firm face hedging its silver price variability using a gold forward contract?

Machine learning

involves the use of large datasets that are required for algorithm training, back testing, and validation. This is from guest speaker, understand

Risk from incorrect or misused models & reports. Companies developing model risk management frameworks because of model risk. Ex: model validation, performance monitoring in place. Potential of adverse consequences from being from misused reports

what is model risk?