Lecture22 - 11/29/2010 MGMT 4370 / MGMT 7760 Risk...

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11/29/2010 1 MGMT 4370 / MGMT 7760 Risk Management Aparna Gupta Lally School of Management and Technology Office: PITTS 2104 Email: guptaa@rpi.edu Phone: x2757 Operational Risk and Risk Management 2 Aparna Gupta, Lally School, RPI The Risk Management Process Identify Risk Exposures Measure and Estimate Risk Exposures Find ways to Shift or Trade Risks Assess Effects of Exposures Assess Costs and Benefits of Risk Mgmt Instruments Form a Risk Management Strategy Avoid Mitigate (Control) Transfer Keep (Retention) Evaluate Performance What is Operational Risk Operational risk is the oldest and the newest risk. Think bank robberies, white-collar frauds. These risks are not speculative; they don’t have an up-side, only downside. Hence, they are pure risks . Managing these risks has historically involved developing practical techniques for minimizing the chance of loss Putting an economic number on the size of the operational Putting an economic number on the size of the operational risks or manage it systematically as a risk class is the new thing – courtesy the thrust on it in Basel accords. Enterprise-wide operational risk management is a major priority Relating operational risk directly to risk capital. Inappropriate to leave an entire class of risk out for risk capital calculations! 4 Aparna Gupta, Lally School, RPI Significance of Operational Risk • Series of catastrophic rogue trader scandals have highlighted the importance of operational risk – Nick Leeson of Barings bank (1995). Causing the demise of a 233- year-old bank. – Jan 2004 National Australia Bank’s A$360 million currency options loss – Jerome Kerviel from Societe Generale of France. Unauthorized t d ttl i h €49 9 billi trades totaling as much as €49.9 billion. • The increasing complexity of financial instruments and information systems increases the potential for operational risk events. – Increasing possibility of mispricing and ineffective hedging. – Errors in data feeds can very significantly distort the bank’s assessment of its risks. 5 Aparna Gupta, Lally School, RPI Definition of Operational Risk • The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events . People risk
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This note was uploaded on 01/27/2011 for the course MGMT 4370 taught by Professor Gupta during the Fall '10 term at Rensselaer Polytechnic Institute.

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Lecture22 - 11/29/2010 MGMT 4370 / MGMT 7760 Risk...

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