Risk Management Elements

Risk
Risk is a condition in which there is a possibility of an adverse deviation from a desired outcomes that is expected or hoped for. Risk is used to describe any situation where there is uncertainty about what outcomes will occur.

Risk management
The process of analyzing exposure to risk and determining how to best handle such exposure.

Risk Management Elements

Standards and Reports. Underwriting Authority and Limits.

Standards and Reports.

This involves two different conceptual activities: Standard setting and Financial reporting.

Underwriting standards, risk classification and standards of review are traditional tools of risk control. Consistent evaluation and rating of exposures of various types are essential for management to understand the risk on both sides of balance sheet and extend to which these risks must be mitigated or absorbed.

The standardization of financial reporting by outside audits, regulatory reports, and rating agency evaluation for investors to gauge assets quality and firms level risk.

Underwriting authority and limits

Another technique for internal control of active management is the use of position limits, and minimum standards for participation. In terms of the latter, the domain of risk taking is restricted to only those customers or assets that pass some prespecified quality standard.

Investment guidelines or strategies

An investor's plan of attack to guide their investment decisions based on individual goals, risk tolerance and future needs for capital. The components of most investment strategies include asset allocation, buy and sell guidelines, and risk guidelines.

Investment guidelines and recommended positions for the immediate future is the next key element. Strategies are outlined in terms of concentration and commitments to particular areas of the market, the extend of desired asset mismatching or exposure to interest rate and need to hedge against systematic risk of particular type.

Incentive Schemes
Firm can enter incentive compatible contract with senior management, lime managers and sale agents and make compensation related to the risk borne by these individuals, then the need for elaborate and costly controls is lessened.