Introduction to Risk Management

What risk management is (and is not), the framework and governance that support it, how risk tolerance and risk budgeting turn the board's appetite into limits, the financial and non-financial risks organisations and individuals face and how they compound each other, and the tools for measuring risk and modifying it through avoidance, self-insurance, insurance and derivatives.

1. 1. Risk, risk exposure and what risk management isRisk management means deciding how much risk to take, measuring how much is actually being taken, and moving the second toward the first, so as to maximise the value of the company or portfolio, or the utility of an individual.Free12 min
2. 2. The risk management frameworkA risk management framework is the infrastructure, processes and analytics that let an organisation measure its risks and keep them in line with its tolerance; it is custom-built, but every framework addresses the same seven factors.13 min
3. 3. Risk governance and the enterprise viewRisk governance is the board's top-down direction of risk management: it sets goals and risk appetite, gives management clear authority and oversees the result, always with the value of the whole enterprise in view.12 min
4. 4. Risk tolerance and risk budgetingRisk tolerance says how much loss and failure the organisation is willing to accept; risk budgeting then quantifies that tolerance in specific metrics and allocates it across activities, forcing every decision to earn its share of the risk.Video · 6 min14 min
5. 5. Financial and non-financial risks, and how they interactFinancial risks come from the financial markets (market, credit and liquidity risk); non-financial risks come from inside the organisation or from its environment; and in practice risks feed on one another, so the combined damage is usually worse than the sum of the parts.15 min
6. 6. Risk drivers and risk metricsRisk is driven by macroeconomic, industry and company factors, and it is measured with metrics suited to each exposure, from probability and standard deviation to beta, duration, the Greeks and value at risk, supplemented by scenario analysis and stress tests.14 min
7. 7. Modifying risk: avoid, accept, transfer or shiftOnce risk is measured, it is aligned with tolerance by avoiding it, accepting it (self-insurance, diversification), transferring it to an insurer, or shifting it with derivatives; the choice weighs costs against benefits in light of the organisation's risk tolerance.Video · 7 min15 min
8. 8. Integrated case: hedging the currency of a foreign bond holdingA forward hedge removes the currency leg from the three-asset variance formula and shifts expected return by the forward premium or discount, but because the holding keeps changing in value the hedge is never exact.15 min