Financial Risk Management

Financial Risk Management:

• What is financial risk management?

– Reducing variability of returns from a financial asset or decision

• Why a course on FRM separately? Why should you spend your time on this?

– Wide relevance

• Is as much about deciding where to allocate capital, how to increase returns from an asset, etc as it is about avoiding losses

• Its not only for “risk managers“. Its core for anyone who’s job is to deliver returns on financial assets or decisions.

• Not needed only in “tough times”, if not more relevant, in “good” or “boom” times

– Is a sub-discipline unto itself and needs some separate focus from other parts of

• needs a theoretical foundation that can be used as a broad general approach to solve a wide range of problems with some adaptation;

• Has its own set of techniques and tools that can be used to solve specific problems, but also adapted to similar problems

– An area of increasing opportunity for financial practitioners in India

• Traditionally, India has been more tacit and judgment driven

• Complexity, maturity, scale increase in types of financial products and decisions means a step change will be needed in approach to FRM both as an independent area, and as a business approach

• Skill sets, tools, experience, data –huge gap vs what’s needed in most organizations

• Presents a substantive opportunity for financial practitioners- irrespective of their stated role- to add something and differentiate themselves and their employers in the market place

This course will have met its objectives if by the end you can:

– Think of risk problems using a generalized approach from first principles, so that you can understand what needs to be solved (if at all); and how to get started in real life; even if you have not seen that particular problem before; across different areas- market investments, project decisions, lending (Corporate or consumer) etc.

– Specifically apply certain general principles of Risk Adjusted Return on Capital (RAROC), Value at risk (VAR); portfolio risk management and pricing; single exposure management; avoidance/mitigation/pricing approaches- by identifying what’s applicable and then adapting to a generalized problem by breaking it down into components.

– Know what math principles apply to each class of problem and what technique to use/revise,