1.1 Introduction to risk management
Economic capital is the amount of liquid capital necessary to cover known losses. For example, if one-day VaR is $2.5 million and the entity holds $2.5 million in liquid reserves, then they have sufficient economic capital.
Economic capital (经济资本)
Expected loss considers how much an entity expects to lose in the normal course of business. These losses can be calculated through statistical analysis with relative reliability over short time horizons.
Expected loss 预期损失是指一个实体在正常经营过程中预计会损失多少。这些损失可以通过短期内相对可靠的统计分析来计算。投资组合的预期损失一般可以作为以下函数计算:(1)风险发生的概率;(2)美元风险敞口事件;(3)如果风险事件确实发生，损失的预期严重程度。
1. Expected loss 2. Unexpected loss 3. Known unknowns 4. Unknown unknowns
Loss Categories
The risk management process is designed to determine if the perceived reward justifies the expected risks. Whether the risks could be reduced and still provide an approximately similar reward. 1. Identify risks. 2. Measure and manage risks. 3. Distinguish between expected and unexpected risks. 4. Address the relationships among risks. 5. Develop a risk mitigation strategy. 6. Monitor the risk mitigation strategy and adjust as needed.
Risk Management Process perceived (察觉到的). mitigation (缓解) monitor (监测)
Scenario analysis is a process that considers potential future risk factors and the associated alternative outcomes. The typical method is to compare a best-case scenario to a worst-case scenario, which shocks variables to their extreme known values.
Scenario analysis 情景分析 (a part ofQualitative Risk Assessment)
Value at Risk calculates an estimated loss amount given a certain probability of occurrence. For example, a financial institution may have a one-day VaR of $2.5 million at the 95% confidence level. That would be interpreted as having a 5% chance that there will be a loss greater than $2.5 million on any given day. VaR is a useful measure for liquid positions operating under normal market circumstances over a short period of time. It is less useful when attempting to measure risk in non-normal circumstances, in illiquid positions, and over a long period of time.
Value at risk (VaR) 风险价值 (a part of quantitative measure) interpreted (解释.v) attempt (企图.v)
Risk Management includes the sequence of activities aimed to reduce or eliminate an entity's potential to incur expected loss. On top of that(除此之外), there is the need to manage the unexpected manage the unexpected variability of some costs. In managing both expected and unexpected losses, risk management can be thought of as a defensive technique. However, risk management is broader in the sense that it considers how an entity can consciously determine how much risk it is willing to take to earn future uncertain returns.
What is Risk Management?
Risk is the uncertainty surrounding outcomes. Investors are generally more concerned about negative outcomes (unexpected investment losses) than they are about positive surprises (unexpected investment gains). Additionally, there is an observed natural trade-off between risk and return; opportunities with high risk have the potential for high returns and those with lower risk also have lower return potential.
What is Risk?
Risk taking refers to the active acceptance of incremental(递增的) risk in the pursuit(追逐/爱好) of incremental gains. Risk taking can be thought of as an opportunistic(机会主义的) action.
What is risk taking?
