What Is Risk Management?

MATH RESEARCH PAPER

RISK MANAGEMENT

Wang Liang

Noriyuki Sasaki

Karina W Teguh

2015

Table of Contents

1. Introduction ……………………………………………………………….3-4

2. Abstract …………………………………………………………………….4-5

3. Risk Metrics ………………………………………………………………5-11

• Definition of Risk Metrics …………………………………………….5-7
• Three models for calculating VaR on RiskMetrics …………………..7-11
• Summary ………………………………………………………………..11

4. Credit Metrics …………………………………………………………...11-14

5. Conclusion ………………………………………………………………….15

6. Reference ……………………………………………………………….15-16

Introduction

What is Risk Management?

The definition stated in the standard (AS/NZS 4360:2004) as "the systematic application of management policies, procedures and practices to the tasks of establishing the context, identifying, analyzing, assessing, treating, monitoring and communicating” .It is essentially to quantify or predict the potential losses in investment and then instigate the appropriate solution. A false analysis of the risk would result in severe consequences for companies or individuals. For example, the recession which began in 2008 was largely caused by credit risk misinterpretation of financial firms.

Why risk management is important?

We are living in uncertainty. We have seen climatic change, recession, globalization, boom and bust with their impact in varying degree. In our daily life we are accustomed of taking risk, for example walking across the road. As individuals if we taking a risk and failed, the impact only affected us and or our close relatives, but if we are speaking about a company that making a wrong decision it will affected many people, their employees, shareholders, and even the country economics.  

Risks can come from uncertainty in financial markets, threats from project failures, legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attack from an adversary, or events of uncertain or unpredictable root-cause. Several risk management standards have been developed including the Project Management Institute, the National Institute of Standards and Technology, actuarial societies, and ISO standards. Methods, definitions and goals vary widely according to whether the risk management method is in the context of project management, security, engineering, industrial processes, financial portfolios, actuarial assessments, or public health and safety.