FIN 4414 Lecture Notes - Lecture 21: Scenario Analysis, Operational Risk, Reinsurance
28 Mar 2017
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There is no market for when you want to sell. > trying to sell a house but there are no buyers. > risk that some weird, bad thing happens (catch-all risk) Cfo embezzles, terrorist attack on office, etc. > sued for something big: decision-making based on risk. Diversification, reinsurance: basic steps in rm process. Strategic decisions: risk management system can not . Always be correct: risk management system can . Recommend how to change risk profile: risk measurement. Ex: needs confidence level & time period. Meaning, in the worst 5% of days, you will lose at least. Var is not senestive to what happens after the interval. Other measure of risk = cvar that has a % & time interval. In the worst 5% of days, you will lose on average. Predicted worst case loss at a specific confidence level (99%) over a certain period of time: shortcomings of var.
