Money Risk Management Stock Trading made easy!

Posted by admin on Jun 18, 2010

Protecting your Trading Capital

By Joseph Barrington-Lew

More than 90% of people trading the share market lose money because the majority do not use correct Money & Risk Management principles or have the discipline to follow them.
Money Management, Position / Trade Sizing No matter what you call it, You Better Know It!

“Money Management is like sex: Everyone does it, one way or the other, but not many like to talk about it and some do it better than others. But there’s a big difference: Sex sites on the Web proliferate, while sites devoted to the science of Money & Risk Management are somewhat difficult to find.”                     – Gibbons Burke

NEVER risk more than 2% of your Trading Capital on any one trade.                                 e.g. If you have $30,000 your maximum risk is $600 but what many forget is to also cater for brokerage. If it’s say $50 RT your maximum risk is now $550 and a stop is set appropriately so if your share drops in value by $550 you EXIT first opportunity.

Never Trade with more than 20% of Trading Capital on any trade.
e.g. Again, if you have $30K your trade size would be $6000 but I prefer to use 19% so if I have 5 open trades and will still have 5% of my trading capital out of the market to allow for things like slippage, education, data, etc.

Here’s a simple mistake many make regarding their Trading Capital?                        e.g. My 1st trade is now worth $7000, up $1000 so I decide to open my 2nd trade.

Do I base my next trade TC value $26,000 or $20,000 or $25,000 again?

The correct method is to first determine the share value if your current stop was hit. You may be up $1000 but your trailing stop is set and if hit you make less, say $900 so the next calculation would be based on $30,000 + $900. Your true Trading Capital is your available Cash + or – the value of all open positions if all stops were hit.

”The only things in life that are certain are Death and Taxes!” Benjamin Franklin
So it should be noted that past performance is not a reliable indicator of future performance but you can control the risk you’re exposed to.

It’s the 21st Century and it’s quite normal to manage one’s own investments, yet very few implement disciplined, professional money risk management principles or understand them. During the stock market boom, limiting risk was always an afterthought, but given the recent volatility & market conditions, let’s get serious!

Professional Money and Risk Management strategies, used correctly and together, will be your foundation to trading success. Essentially, Money Management tells you how many shares to trade at any given time and Stop placement is where you must accept you have made the wrong decision, close that trade and move on. It is a defensive concept that keeps you in the game to play another day. Don’t confuse Money Management with Stop placement. Stop placement does not answer the question, how much?

Risk Management is the difference between success and failure when trading shares. It refers to Stop placement and will minimize any losses and you WILL have them but will also maximise any profits and this stop is called a Trailing, Maintenance or Profit Stop.

Money Management optimizes capital usage. Few have the ability to view their portfolios as a whole. Even fewer traders and investors make the move from a defensive or reactive view of risk, in which they measure risk to avoid losses, to an offensive or proactive posture in which risks are actively managed for a more efficient use of capital. JBL Risk Manager will help you do all of the above and very easily.

JBL Risk Manager is a simple but Professional Money Risk Management program that was specifically developed to combat the above problem BUT unfortunately the trial is currently only available to those that receive or have access to MetaStock format data. It will automatically calculate your Trade Size, Stop Loss price, Trailing Stop, Break-even price and so much more, based on the last close. It will, of course, also allow you to change your anticipated buy price to actual buy price (slippage) It will indicate when to look for another trade and also automatically report on your performance by showing you your portfolio %win-loss ratios, average $win-loss, trade expectancy and much more, accurately. The latest version now includes, with permission from The Van Tharp Institute, performance values such as R-Multiples, R-Expectancy and System Quality Number. I hope you give this program a trial. After more than a decade helping novice and seasoned individuals understand the importance of Money Risk Management I am pleased to say this simple program will do that and remove emotion and guesswork from your trading decisions.

You also have available to you a facility to enter a Technical Stop as your trailing Stop, if you wish, but after many years of testing and research I have found that most use Technical Analysis for entry and correct Money Risk Management for their exit. Long term investors may use Fundamental Analysis to find financially healthy companies first then TA for entry and MR Management for exit. That is all for now.

More info: www.paconsulting.net.au/Share-Trading-Investing-FX/jbl-risk-manager/
The 14 day FREE trial is available once at the above link.
You may wish to also view a video of the program at www.youtube.com. Simply enter Money Management Stock Trading Software into YouTube search box.

I wish you all trading success!

Joseph Barrington-Lew

Online Business Risk Management Degree Program

Posted by admin on Jun 18, 2010

Business risk management is a career that emphasizes the need for management and evaluation of threats to a company and the development of strategies that can get rid of those threats or problems.

What Should You Know When Considering An Online Degree In Business Risk Management?

Business risk management professionals can be termed as financial managers that are given the task of preparing the company’s insurance budget. In addition, they also need to deal with many financial transactions. Business risk management professionals make sure that they come up with a detailed plan in order to reduce financial risk. To be successful in this profession, you must have good problem solving and analytical skills. After all, you need to analyze facts and figures in order to make an accurate business forecast.

What A Business Risk Management Degree Online Can Teach You

By entering an online business risk management degree program, you will get a solid understanding of financial forecasting, marketing, accounting, public relations, budgeting and conflict resolution. Whatever online degree program you go for, one thing is for sure that you are going to find plenty of career opportunities. After earning an Associate’s degree in business risk management, it is advisable that you continue your education and complete your Bachelor or Masters Degree in business risk management.

Career Outlook with Business Risk Management Program Online

With an online business risk management degree, you can work as a risk manager or risk assessment officer. If the idea of working as a risk manager or risk assessment officer does not excite you, there are other options available as well. These include working as an accountant, budget analyst, supervisor and corporate manager.

Advantages of Business Risk Management Program Online You can earn an online business risk management degree even while you are working. You can attend classes whenever you want from the location of your choice. You can easily get admitted to higher education degree programs. For working professionals, an online business risk management degree can play a vital part in job promotion. Study material is provided by the online university, so you do not need to prepare notes on your own.

Healthcare Risk Management: What’s Your Biggest Exposure?

Posted by admin on Jun 16, 2010

Healthcare Risk Management: What’s your biggest exposure?

If we think about a comprehensive healthcare risk management solution, what are some of the things that come to mind? If you look up this topic on the internet, you’re sure to receive a litany of different answers. Healthcare risk management could mean managing the risks of who is going to pay you, managing privacy issues, or handling the risk of security breaches – the list goes on and on. I sat down with one of the most experienced healthcare professionals I know to give me her perspective on risk from the top. Her name is Marsha Burke, and she was most recently the Chief Executive Officer of WellStar Health System, one of the largest health systems with over $1 billion in annual revenue and over 1,300 hospital beds.

Identifying a Proper Risk Management Solution

One of the biggest healthcare risk management issues on her mind was patient safety. This topic has garnered lots of attention in the news, and multiple groups have dedicated teams reviewing this initiative. I asked Marsha Burke about all the advancements that hospitals have made with respect to patient safety, and if it was still possible to walk in to a patient’s room with unvetted access. The answer was yes. “Certain areas have more security than others, such as the baby ward and the intensive care units, but it would be very difficult to try to secure all rooms of an entire hospital,” mentioned Marsha. It is true that security can at times collide with commerce, but hence the term risk management…not risk elimination.

The biggest concerns around healthcare risk management security issues seem to still involve people. We see it all the time where doctors whose medical licenses have been revoked are still practicing or where a nurse who isn’t certified somehow gets through the system. How do you fix this problem? Marsha said that “if there was a healthcare risk management solution that could constantly monitor any changes in criminal history or licensure status and instantly alert the employer if there has been a new incident, that tool could be immensely helpful.” Again, all of this boils down to cost.

Supply chains have also become a major healthcare risk management issue for many industries. Many new laws now require that contractor employees be screened almost to the same degree as any new employee beginning work. With this amount of new work, it is almost impossible to operate without getting new funding. In the healthcare field, securing new funding, particularly for non-profits, can be difficult. “It always helps to be able to draw a parallel between outgoing costs and securing new revenue,” said Marsha.

Ensuring Patient Safety & Other Concerns

Being as risk-conscious as a CEO of a major healthcare chain needs to be, Marsha successfully implemented a healthcare risk management solution powered by the latest technology. Healthcare is a technologically-driven enterprise, but even with all the advancements in the world of MRI’s, CT scans, and robotic surgeries, it’s still a very service-oriented business, and service requires people. You still have lots of people coming and going. It’s pretty easy to make sure your machines are secure, but the biggest risk is still people. That’s what a hospital’s most important asset is. “Managing the risk between patients, employees, suppliers, sales reps and everyone else coming onto the property can be daunting, but it is still the most important part of a healthcare enterprise,” Marsha re-iterated in closing.

Finding a risk management solution that works, while keeping to financial constraints, is a necessity. Fortunately, there are healthcare risk management systems that exist to assist with all of these different issues. Some may do everything, or nothing, or anything in between. The important issue to remember when it comes to finding a healthcare risk management solution is DO NOT DO NOTHING. Patient safety isn’t an issue that is going to go away and, with all the political discussions regarding healthcare, now is not a time to be on the front page news explaining a lack of a risk management solution. As Marsha mentioned, there are many facets of risk, but people are still the biggest one.

Capitalize On Reference Data & Risk Management Software

Posted by admin on Jun 14, 2010

Increasingly complex derivative markets are forcing financial institutions around the world to catch hold of trading and Risk Management solutions. There is no room for error in financial reporting processes, which makes best practices and reliable software tools extremely important.

A risk management system (RMS) helps an organization to identify the risks and security issues associated with their business and assets. Once these threats have been established, the RMS measures the risks and prepares strategies to minimize them. There are some highly focused firms that offer leading-edge software for Data and Risk Management. Their all-in-one software platform for Reference Data and Risk Management is scalable with modules covering small to large projects. The platform supports a large number of data feeds and manages all financial data in one central place. Its high level of flexibility is guaranteed by its independent modules that preserve their full functionality even if used separately. Financial institutions all over the world rely on this modular platform that can be customized to specific requirements. The major elements include:

Data Management Software: The all-in-one solution for efficient Reference Data and Static Data Management, Corporate Actions processing, Golden Copy management, Data Cleansing, Data Reconciliation, Exception handling & more. Thus, it is the ideal solution for:

Processing of pricing / static data
Processing of Corporate Actions
Importing and mapping data feeds
Application of complex Business Rules

With its automation, routing and onscreen display features, this Data Management system facilitates the day-to-day management of reference data. Backed by supported formats, the solution can simultaneously meet the special requirements of different departments within one company.

Risk Management Software: A fully integrated, state-of-the-art, risk management solution that focuses on the quality of upstream or downstream processes to move from pure risk analysis to efficient risk control. Thus, it is the ideal solution for:

Portfolio Analysis
Market risk
Credit risk
Operational risk
Value at Risk and performance reporting
Extensive instrument pricing functionality
Simulations, Stress Tests, Scenario Analyses
Risk Category Analyses and Limit Analyses

For financial organizations through to corporations and insurance companies, an effective and robust risk management system is essential; not just due to regulations in the sector, but to protect the company in uncertain financial markets. Such a system can also provide protection against project failures, legal issues, natural disasters, accidents and security breaches.

As the knowledge of advanced technology applications in risk management increases, financial firms are finding innovative ways to use them practically, in order to insulate themselves. So, employ these tools to make the best practices and solutions available, and turn the upcoming challenges into opportunities for competitive advantage!

Project Risk Management

Posted by admin on Jun 12, 2010

All of us manage risk in our day to day life by buying insurance cover for our life, house, car etc, so why not do risk management for the project. Risk Management is a key responsibility of the project manager.

Risk management is one of the project management disciplines which have a direct impact on the project success or failure. A better risk management ensures that you are prepared for the unforeseen circumstances and when they actually happen, you can handle it well. Some Project managers show helplessness in case of some external disturbances like workers strike. But good managers do not. They do plan for such risk and have a ready work around.

However, all real projects carry risk through uncertainty.  The most obvious examples of sources of project risk comes from:

* dependencies (internal or external)

* assumptions made by project team members (about any aspect of the project).

There are 4 stages in the Project Risk management process :

1. Risk Identification

In this stage, we identify and name the risks. There are different sorts of risks and we need to decide on a project basis. Business risks are ongoing risks that are best handled by the business. Generic risks are risks to all projects.

2. Risk Quantification

Risk need to be quantified in 2 dimensions. The impact of the risk needs to be assessed. The probability of the risk occurring needs to be assessed. If probability is high, and impact is low, it is a Medium risk. On the other hand if impact is high, and probability low, it is High priority.

3. Risk Response

A risk response plan should include the strategy and action items to address the strategy. The actions should include what needs to be done, who is doing it, and when it should be completed.

4. Risk Monitoring and Control

The final step is to continually monitor risks to identify any change in the status, or if they turn into an issue.

At the start of a  project, the potential impact of risk is almost unlimited. The simple choice is to either dedicate proper and timely attention to understanding and managing risk, or suffer its consequences. On large projects, there are few areas where a Project manager can have a greater  impact on a project than the area of risk.

Three Easy Steps to Risk Management

Posted by admin on Jun 10, 2010

“All project management is risk management” (Eric Verzuh) Risk management is an essential activity in any project or organisation. Risk is defined by M_o_R (Management of Risk, the OGC risk management methodology) as uncertainty of outcome. A risk manager is concerned with managing the risks (uncertain issues and incidents) that, were they to occur, would affect the product or services that an organisation sets out to deliver. The M_o_R framework highlights three basic steps to effective risk management that can be applied within an organisational or project context: • Identify The first step of risk management is risk identification. This includes naming and describing any risk that might affect the achievement of objectives, to ensure that there is a common understanding of these risks among all appropriate individuals involved in the organisation or project activity. Techniques for identifying risks will differ according to the size and structure of the organisation, the nature of the activity or project and the experience of the risk management team. For example, risk management within a small software organisation may involve brain-storming and discussing potential risks to the project, based on the expertise of the developers involved. A large government body, on the other hand, might draw on the experience of risk management experts who have dealt with risks across a range of similar organisations. Project managers responsible for risks to a technical activity might call on the authority of experts to highlight the relevant risks. • Assess Evaluation is critical to successful risk management. Without critical analysis of the risks identified in step one, the risk manager may fatally underestimate the potential impact of one particular risk, or (also fatally) attempt to combat each and every risk, without considering how likely it is that a risk will occur. The two factors that must be considered in risk analysis are: o probability o potential impact Individuals responsible for managing risks must also be aware of the organisational context of the risks. For example: Risk A may have a greater impact on Output 1 than the effect of Risk B on Output 2. However, if Output 2 is more important than Output 1 to the overall objectives, then Risk B may be considered more important than Risk A. Ranking risks according to immediacy, impact and organisational context enables the risk manager to prioritise and plan how individual risks will be controlled. • ?Control The risk manager needs to identify the appropriate response to a risk and assign a risk owner, who ensures that the risk response is carried out, monitored and controlled.

Integrated Risk Management Software Effectively Simplifies Risk Governance

Posted by admin on Jun 8, 2010

Risk management is a complicated and time-consuming process which can turn out to be quite costly. However today you will be able to find risk management software that has the ability to drastically simplify this complicated procedure by integrating risk governance within the organization.

Such software assists an organization on multiple levels. First of all it gives them the ability to identify risk and take measures to avoid it. Secondly it endows them with the proper means of managing risk. By making use of integrated risk management information system software the risk is minimized. One of the most basic yet extremely comprehensive elements of this integrated approach is a task based calendar and checklist. This endows the organization with a highly secure and aptly detailed audit trial. Further this trial can be retrieved from a variety of fully customizable reports. Risk governance has thus become a very extensive forte along with becoming extremely comprehensive. 

The integrated risk management information system works to simplify the risk management activities of an organization. It does this by accurately quantifying the risks based on current risk settings which allows the management to take effective steps to minimize the impacts of risk on the organization. The integrated risk management information system software comes embedded with a built in risk description along with classification, impact and action status system. What this does is that it enables the risk information and actions to get directly linked with the hierarchy of project tasks. In effect employees will not be overwhelmed with extensive information which becomes difficult to manage. The fact that this software has the ability to keep the risk information specific to the current task at hand helps to save up on time and money which is what makes it extremely effective.

Task Based Calendar

One of the key features of the integrated risk management information system software is the task based calendar. Each employee is provided with an individual task based calendar according to the responsibilities assigned to him. This calendar helps to organize the work flow and automatically sends email alerts within the organization thereby establishing links to specific task related documentation. In effect it also enables a task feedback facility along with providing task sign off protocols. 

Adaptability of Risk Management Software

The biggest plus point of this innovative risk management software is the fact that it is highly adaptable and can be used to prevent all kinds of risk. It is this flexibility that makes the integrated risk management information system unique. The same features can be adapted to function as environmental management software (EMS). At the same time this technology fully facilitates for the risk governance of finance, occupational health and safety, marketing as well as technological risk management. Similarly this technology is also being used for the purpose of project management within organizations as well which goes to show the versatile nature of the risk management software and how it can effectively simplify the entire process of risk management.

Credit Risk Management

Posted by admin on Jun 6, 2010

The active management of credit risk has been receiving increasing regulator attention and strategic focus at many financial institutions. Regulators cite poor credit risk management at the portfolio level, weak credit standards for borrowers and counterparties, and insufficient attention to changes in economic and other circumstances affecting the capacity of borrowers and counterparties as the highest contributors to inadequate credit risk management. Regulators have changed capital charges to make financial institutions more responsive to actual credit exposure and have set new rules for how much capital banks must set aside to cover potential losses.

The basic principles for an effective credit risk management process were outlined in the consultative paper “Principles for the Management of Credit Risk,” issued by the Basle Committee on Banking Supervision. We consider it appropriate to underscore these principles in view of the current regulatory and credit market influences.

Definition of Credit Risk

Credit risk is the risk of loss arising from a borrower’s or counterparty’s inability to meet its obligations. The majority of a financial institution’s credit risk arises from its lending activities – outstanding loans and leases, trading account assets, derivative assets, and unfunded lending commitments that include loan commitments, letters of credit, and financial guarantees. It also exists in other activities such as acceptances, interbank transactions, trade finance, and retail and investment settlements.

Managing Credit Risk

It is important to formulate and implement a structured credit policy and related processes to manage credit risk. Strategies for credit risk management, including credit policy development and risk monitoring, is the responsibility of business unit and senior management, and the board of directors.

Financial institutions should establish credit limits to control the risk in all credit-related activity. Limits by industry sector, geographical region, product, customer, and country should be specified, along with the approaches to be used for calculating exposures against those limits, and made part of credit policy. Consideration should also be given to the spread across industries or regions as the default of one firm or industry may also affect others. Larger financial institutions might also consider multiple limits for each borrower or borrower group, by product, operational unit, and borrower member so that banking and trading activities of those borrowers or borrower groups creating credit risk can be more adequately monitored. While the trend has been that many financial institutions monitor total exposures in those categories, most have not set maximum limits on those exposures.

Commercial Portfolio Credit Risk Management

Credit risk in the commercial portfolio can be managed based on the risk profile of the borrower, repayment source, and the nature of underlying collateral given current events and conditions. Commercial credit risk management should begin with an assessment of the credit risk profile of an individual borrower or counterparty based on current analysis of the borrower’s financial position in conjunction with current industry, economic, and macro geopolitical trends. As part of the overall credit risk assessment of an obligor, each commercial credit exposure or transaction should be assigned a risk rating and be subject to approval based on approval standards defined in credit policy. Subsequent to loan origination, risk ratings should be adjusted on an ongoing basis as necessary to reflect changes in the obligor’s financial condition, cash flow, or ongoing financial viability. The regular monitoring of a borrower’s or counterparty’s ability to perform under its obligations allows for adjustments to be made that will affect the credit exposure measurement.

Risk rating aggregations should be considered for measurement and evaluation of concentrations within portfolios. Risk ratings are also a factor in determining the level of assigned economic capital and the allowance for credit losses.

To manage the relative risk within the commercial portfolio, many financial institutions utilize participation or syndication of exposure to other financial institutions or entities, loan sales and securitizations, and credit derivatives to manage the size of the loan portfolio and the relative associated credit risk. These activities can play an important role in reducing credit exposures for risk mitigation purposes or where it has been determined that credit risk concentrations are undesirable.

Consumer Portfolio Credit Risk Management

Credit risk management for consumer credit should begin with initial underwriting and continue throughout a borrower’s credit cycle. Consumer and other common attributes to evaluate credit risk. Statistical techniques may be used to establish product pricing, risk appetite, operating processes, and metrics to balance risks and rewards appropriately. Statistical models can be purchased or created that use detailed behavioral information from external sources such as credit bureaus, along with internal historical experience. These models should be validated periodically to assure they continue to be statistically valid and reflect performance of the institution’s customer base, particularly if used for credit scoring. When used, these models will form the foundation of an effective consumer credit risk management process and may be used in determining approve/decline credit decisions, collections management procedures, portfolio management decisions, adequacy of the allowance for loan and lease losses, and economic capital allocation for credit risk.

Accurate Calculations of Exposures

Assuring accurate calculations of exposures against limits is critical to managing credit risk. Methodologies will vary according to product types. For lending products and current accounts, the book balance is considered an appropriate measure, with related accruals included as part of the exposure as default of a counterparty on the primary exposure would also likely lead to loss of interest income. The current market value should be used for issuer exposures on bonds and equities, with replacement cost of the trade used as measure for any unsettled trades. For foreign exchange and derivatives, exposure should be measured at the replacement cost of the trades plus an add-on value based on the nominal value to reflect potential future adverse movements in the replacement cost.

Concentrations of Credit Risk

Portfolio credit risk should be evaluated to assure that concentrations of credit exposure do not result in undesirable levels of risk or in violations of regulatory requirements. Regular review and measure of concentrations of credit exposure against established limits by product, industry, geography, and customer relationship should be performed. For specialized industries, additional measurement categories may be appropriate, such as geographic location and property type for commercial real estate loans. When exposures exceed established limits, an escalation process should be triggered to avoid potential conflicts and to assure senior management is aware of all excesses. Periodic revalidation of established limits would be appropriate to assure that the limits continue to match the strategic risk appetite, provide for targeted asset mix, and recognize potential exposures as anticipated.

Examination of Credit Risk Management

Regulatory examination activities use a variety of techniques to assess a financial institution’s credit risk, including a sampling of loans and review of the institution’s credit management processes. Consideration is given to the complexity of the financial institution’s products and activities, and overall risk management practices. Designing, implementing, and adjusting processes and practices to effectively manage credit risk will limit unanticipated exposures.

For more information about credit risk management, please visit <a rel=”nofollow” onclick=”javascript:pageTracker._trackPageview(‘/outgoing/article_exit_link’);” href=”http://www.younginc.com”>www.younginc.com</a>

Risk Management In Banking Companies

Posted by admin on Jun 4, 2010

RISK MANAGEMENT IN BANKING COMPANIES

Risk Management in bank operations includes risk identification, measurement and assessment, and its objective is to minimise negative effects risks can have on the financial result and capital of the bank. Banks are required to form a special organisational unit for the purpose of risk management. The risk to which the bank is particularly exposed in its operations are market risk(interest rate risk, foreign exchange risk, risk from change in market price of securities, financial derivatives and commodities), credit risk, liquidity risk, exposure risk, investment risk, operational risk, legal risk, strategic risk. These risks are highly inter-independent. Events that affect one area of risk can have ramifications for a range of other risk categories.

CREDIT RISK MANAGEMENT

Credit risk is defined as the potential that a bank borrower or counter party will fail to meet its obligations in accordance with agreed terms. The goal of credit risk management is to maximise the bank’s risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit risk inherit in the entire portfolio as well as the risk in individual or credits or transactions.

For most banks, loans are the largest and most obvious source of credit risk; however, other sources of credit risk exist throughout the activities of the bank, including in the banking book and the trading book and both on and off the balance sheet. Banks are increasingly facing credit risk (or counter party risk) in various financial instruments other than loans including acceptances, inter bank transactions, trade financing, foreign exchange transactions, financial future, swaps, bonds, equities, options and in the extension of commitments and guarantees, the settlement of transactions.

BASAL II ON CREDIT RISK

The basal community on banking supervisionrelease a consultative document on New Capital Adequacy Framework with the view to replacing 1988 Accord. The document proposes three pillars for the new accord-

1. Minimum Capital Requirements, 2.Supervisory review 3.Market discipline

A new accord continues with the minimum capital adequacy ratio of 8% of risk waited assets. Arrange of options to estimate capital as proposed in the document include a standardised approach. Under this approach, preferential risk weights in the range of 0%, 20%, 50%, 100%, and 150% are envisaged to be assigned on the basis of external credit assessments. Under foundation Internal Rating Based (IRB), community proposes certain minimum compliance.wiz.a comprehensive credit rating system with capability to quantify Probability of Default (PD) while assigning preferential risk weights, with the information supplied by national supervisor on loss given default (LGD) an exposure at default. Adoption a New Capital Accord by banks in the proposed state requires complete change in the existing risk management systems.

MARKET RISK MANAGEMENT

Banks are exposed to market risk via their trading activities and their balance sheets. Two types of risks are considered the market risks for the bank such as interest rate risk and foreign exchange risk. Banks face the foreign exchange risk due to exchange rate fluctuations and interest rate is the most common risk all the banks manage because all the financial products issued by bank are interest rate sensitive.

1. INTEREST RATE RISK

Interest Rate Risk is a risk of negative effects on the financial result and capital of the bank caused by changes in interest rate. The overarching objective of the interest rate risk management is to ensure a cash flow mechanism that is devoid of major mismatches in both assets and liability segments. As financial intermediaries, banks encounter interest rate risk in several ways such as-

Re-Pricing Risk: The primary form of interest rate risk rises from timing differences in the maturity(for fixed rate) and re-pricing(for floating rate) of assets, liabilities off-balance-sheet(OBS)positions. They can expose a banks “income and assets” underlying economic value of unanticipated fluctuations as interest rate tends to be too frequent and volatile.

Yield Curve Risk: Re-Pricing mismatches can also expose a bank to change in slope and shape of the yield curve. Yield curve risk arises when unanticipated shifts of the yield curve have adverse on bank’s income or economic value of their asset porfolio.

Basic Risk: The risk that the interest rate for different assets and liabilities may change in different magnitudes is called basic risk. Such risk arises due to imperfect correlation in the adjustment of the rates earned and paid on different instruments with other wise similar re-pricing characteristics.

Embedded option Risk: An option provides the holder the right (but not the obligation) to buy, sell or in some manner alter the cash flow of the instrument or financial contract. Options may be stand alone instruments such as exchange –trade options and over- the-counter (OTC) contracts, or they may be embedded within otherwise standard instruments. While banks use exchange-trade and OTC-options in both trading and non-trading accounts, instruments with embedded options are generally most important in non-trading activities.

Re-investment Risk: uncertainty about future interest rate gives rise to re-investment risk as future cash flow will be re-invested at a rate unknown at present. Ordinary yield curve, without bootstrapping, does not take into account the re-investment risk.

OPERATIONAL RISK

It isone of the new planks of the Basel-II capital accord. Operational risk is defined as ‘the risk of the loss resulting adequate or failed internal processes, people and system or from external events.’ This definition includes legal risk, but excludes strategic risk and reputational risk. On the other hand, the Reserve bank of India has defined operational risk, as ‘any risk, which is not categorised as market or credit risk, or the risk of loss arising from various type of human and technical errors’.

Sources of operational risk

(i)                 Wrong /delayed decision and lack of accountability, control and proper auditing ,

(ii)               Inadequate MIS ,

(iii)             Incompetency of staff and lack of proper training and job rotation,

(iv)             Lack of succession planning and development of second lines,

(v)               Lack of contingency planning,

(vi)             Non compliance with circulars, policies and regulatory requirement,

(vii)           Obsolete policies,

(viii)         Involvement of the staff in the fraud and forgeries,

(ix)              Failure of electronic instruments ,like computer systems, software and telecommunication equipment,

(x)                Legal flaws in execution of security documents for advances

(xi)              Deterioration of bank image due to poor services,  staff behaviour, frauds, high NPAs, etc

At present, banks account for their losses due to operational risk by debiting it to their P&L account without allocating any capital charge for it, unlike in case of credit and market risk. Under Basel-II, operational risk needs to be assessed separately from three approaches namely (1) Basic Indicator Approach, (2) Standar5dised Approach and (3) Internal Management Approach. Under Basel-II framework of operational risk management, banks are encouraged to move along the spectrum of available approaches as they develop more sophisticated operational risk management system and practices.

LIQUIDITY RISK MANAGEMENT

Liquidity risk is the potential inability to meet the banker’s liability as they become due. It arises when banks are unable to generate cash to meet fund withdrawal, commitment credit or increase in assets. It originates from the mismatches pattern of assets and liabilities. Measuring and managing liquidity needs are vital for effective operations of commercial banks the cause and effect of liquidity risk are primarily linked to the assets and liabilities of the bank. The bank should continuously monitor its liquidity position in a long run and also on a day- to day basis. There are two approaches that relates these two situational analysis such as (1) Fundamental Approach and(2) Technical Approach .

Fundamental Approach: This approach is used in the long run. In this approach the banks try to manage the liquidity risk by controlling its assets –liability positions. A prudent way to tackling this situation could be by adjusting the maturity of assets and liabilities or by diversifying and broadening the sources of the funds.

Technical Approach: This approach focuses on the liability position of the bank in the short run. Liquidity in the short run is primarily linked to the cash flow arising due to the operational transaction. The bank should know its cash requirements and the cash inflows and adjust these two to ensure safe level for its liquidity position.

The Risk Management scenario will strengthen owing to the liberalization, regulation and integration with global markets. Management of risks will be carried out proactively and quality of credit will improve, leading to a stronger financial sector. The future will see a structural change in the banking sector marked by consolidation and a shake-out within the sector. The smaller banks would not have sufficient resources to withstand the intense competition of the sector. Banks would evolve to be a complete and pure financial services provider, catering to all the financial needs of the economy. Flow of capital will increase and setting up of bases in foreign countries will become commonplace.

Choosing and Risk Management Software

Posted by admin on Jun 2, 2010

Managing Risks is an essential part of an organisations well being. Without good risk management strategies they are left open to attack from internal and external sources that can cause real damage. Without assessing and managing risks on a regular basis a company might find they pay the price with their reputation and their bottom line.

The good news is that risk management no longer needs to be a difficult task. Latest developments in risk management software make it easier for a firm to identity and deal effectively with arising problems before they become significant issues. Good risk software provides a structured end-to-end risk management framework for managing an extensive range of strategic and operational risks in a consistent and cost effective manner.

Choosing Risk Management Software

When looking for risk management software, the following key elements should be considered: 

good automation of the key elements of the risk and mitigation cycle
a shared central repository of information
the linking of risks to strategic objectives with both ‘top down’ and ‘bottom up’ views of information
the facility to establish links between risks, controls and people
easy to implement and understand
tools for developing new risk management strategies
a centralised and consistent view of both organisation and individual responsibilities
a wide selection of templates to simplify each stage of the risk management process
rapid implementation so you can be up and running straight away

Using Risk Management Software

Good risk management software should enable a user to do the following: 

1. Identify Risks 

Probably the most crucial part of all risk management software is its ability to assist in the identification and allocation of risks. Software should have the following functionality that enables you to: 

record individual risks
classify each risk by types (e.g. financial, legal, compliance etc.)
import related documents and associate them with the relevant risks 

2. Assess Risks 

Having identified risks the software now needs to aid you in their assessment. Look for software that: 

helps assess and quantify the impact and likelihood of the risk
is an intuitive system for calculating inherent risk
provides different views of each risk 

3. Mitigate Risks 

Once each risk has been assessed the next stage is to identify ways in which to mitigate that risk. Risk management software needs to help you: 

automate calculation and communication of residual risk
create and communicate mitigation and contingency plans to all involved
provide templates for entry and editing of controls 

4. Monitor and Report 

An important part of the risk management cycle is monitoring. Keeping an eye on the progress of risk management measures and their outcome is crucial to ensure they are effectively dealt with and not at risk of reoccurring. Reporting on this progress to management board and relevant departments and individuals is another necessary part of the risk management process. Risk management software can help with this, look for the following features: 

presentation of summary and detailed reporting information on screen
a dashboard facility for producing different ranges of information e.g. for consolidated, summary information at a departmental level
the facility to export reporting data to office applications
current and historical views
standard and customisable reports
automated email-based reminder and escalation facility e.g. To risk managers with uncompleted tasks
vertical and horizontal views e.g. To view the status of all risks classified as ‘Regulatory Risks’