Posts Tagged ‘VaR’

Risk Management: Flawed Fantasy Or Achievable Challenge?

Thursday, June 26th, 2014

By Brendan Hogan, a Masters of Applied Finance student

Lights are flashing. The screams of children are echoing off the walls. The cabin has become an ecosystem of fear and trepidation. There has been no word from the cockpit in over 20 minutes and the rattling of the Rolls-Royce engines mimic the velocity of an earthquake. A flight stewardess appears from the galley and assures the passengers everything is going to be alright. She asks everyone to put their life vests on as a precaution: “standard procedure,” she says. (more…)

When Ignorance is Not Bliss … Just Risky

Tuesday, June 11th, 2013

By Emily Tooker, Student of Master of Business (Applied Finance)

In the popular 1983 comedic film, Trading Places, commodities broker, Louis Winthorpe III, and rags-to-riches profiteer, Billy Ray Valentine, bet their life savings on the frozen orange juice market to accomplish a lucrative trade in a single master stroke.

At the end of the film, we are treated to Winthorpe and Valentine basking on a tropical island, and the token yacht decorating an expanse of blue ocean in the background.

Real or imagined accounts of overnight monetary success, such as that depicted in Trading Places, have given us the false impression that risk will give its due reward. Likewise, basic finance theory tells us that there is a risk-return trade off – to obtain a higher return, you must be willing to take on more risk – and this theory has driven a risk-seeking culture in finance.

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When all you have is a hammer; Why financial managers are so bad at measuring risk

Monday, May 20th, 2013

By Robin (Mac) Stark

When a carpenter sets to work, tools in hand, he is prepared. The house he goes to work on, he is all too familiar with, and, thanks to physics and engineering, he can replicate, time after time, the same solid and reliable structure. Alas – this is not so for the contemporary Financial manager. Yet, there is a belief that a risk analyst can go to her trade, tools in hand, with the same accuracy and reliability of the carpenter. But this is her first mistake, a hammer is a reliable tool derived from the predictability of physics – the carpenter can make use of a simple and reliable hammer because with certainty, the force of the last strike of the hammer will be the same as the next. However, for the risk manager, such an assumption can prove costly, because the game is not the same – finance is not physics, a hammer just won’t do.

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Eyes wide shut: Are finance managers looking but don’t see?

Tuesday, October 9th, 2012

By Shane Murray

In the wake of poor returns or worse, substantial loss of wealth, Financial Managers wear the blame. Like a phoenix born from the ashes of ruin, the angry mob emerges and sprays charge at the financial sector, labelling their behaviour as reckless, their knowledge of financial markets absent and their understanding of risk as infantile. In my opinion this is a justified resolve as from inception, Financial Managers have been monitoring risk with their eyes wide shut. The inherent flaws of contemporary risk models used by Financial Institutions are well known, as too are the means of manipulating portfolios to accumulate risk not captured by their estimates. Such behaviour is reckless and wholly undermines why risk is quantified in the first place. But what choice do Traders have? Year after year shareholders demand bigger and better returns and Financial Managers find themselves in a precarious situation. Should they be reducing the exposures when the mutters of disaster begin to surface, or do they turn a blind eye and rely on their risk metrics as an appropriate scapegoat? After all, taking the safer approach, reducing risk and yielding a lesser return spell certain crucifixion at the hands of the same angry mob. So it seems the problem is twofold. Thankfully, with so much on the line, a collaborative approach to risk supervision is emerging through the Basel accords which aim to dispel such irresponsible behaviour. Unfortunately such endeavours are yet to curb the insatiable desires of the mob, which Financial Managers seem more than willing to oblige.

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Measuring market risk using historical data: Bogus or not?

Thursday, May 17th, 2012

by Mei Lin Ker

Risk management has become the hottest topic ever in today’s turbulent economic climate. We are now still living in the shadows cast by the U.S. subprime crisis in 2008 which has shaken up the U.S. economy with its powerful negative aftershocks reverberating to the rest of the world. Till now, the U.S. economy is making baby steps in recovering from the economic devastation of the Global Financial Crisis (GFC). As big firms collapsed and mega bailouts ensued, people are asking the fundamental question: Why did this happen? Aren’t companies which use highly sophisticated risk management tools able to foresee the impending downfall and, with the information provided, aren’t their risk managers able to take preemptive measures accordingly? Is there then something wrong with these tools or the risk managers?

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