FRM EXAMS 2022

Shortcomings of risk metrics – -May not scale over time -Historical data may be meaningless -Not designed to account for catastrophes -Var says nothing about losses in excess of Var -May not handle sudden illiquidity Importance of communication for risk managers - Need to assess risk and tell management so they can determine which risks to take on Ways firms can fail to account for risks – -Firm may ignore known risk -Somebody in firm may know about risk, but it's not captured by models -Realization of a truly unknown risk Ways risk can be mismeasured – -Wrong distribution -Historical sample may not apply Roles of risk management – -Asses firm risks -Communicate risks -Manage and monitor risks Practical considerations related to ERM implementation – -Designate ERM champion - usually CRO -Make ERM part of firm culture -Determining all possible risks -Quantifying operational and strategic risks -Integrating risks (dependencies) -Lack of risk transfer mechanisms -Monitoring Models used in ERM framework - Modeling approach is typically between statistical analytic models and structural simulation models Risk types addressed by ERM – -Hazard -Financial -Operational -Strategic Traits of ERM – -Enterprise Risk Management -ERM is a discipline - culture of enterprise -ERM applies to all industries -ERM is not just defensive, adds value -ERM encompasses all risks -ERM addresses all stakeholders