Chapter 25

Question 1

What are the functions of a chief risk function

Answer 1

RISK MAP
* Act as a central point for staff to Report new and enhanced risks
* Identify and assess risks the business is exposed to (+ hidden risks, correlations)
* Suggest risk responses to staff
* Keep track of risk management process

• Measure risk exposure vs risk profile
• Advise board on risks
• Pull picture together

Question 2

List the benefits of ERM/ key features

Answer 2

CHARTER
* Consistency across business
* Holistic approach, enhances business
* Aligned with corporate strategy
* Recognises that risks are dynamic and their interaction
* Top-down approach, everyone’s responsibility
* Equitable capital allocation

Question 3

List the functions of a CRO

Answer 3

RISK LEAD
* Report internal + external risks
* Implement ERM framework across business
* Stakeholder communication about risk profile
* Keep risk policies updated

• Leadership and direction for risk management
• Evaluate and manage various risk functions
• Allocate capital across business unit s
• Develop systems to monitor, manage and measure risks

Question 4

Define systemic, systematic and diversifiable risk

Answer 4

Systemic risk
Risk that arises at a firm level and compromises the entire financial market
Example: Bank failure, big gov default on bond repayment

Systematic risk
Risk that affects the entire financial system or market, not just one participant
Example: Economic recession, stagflation and interest rate spikes

Diversifiable risk
Risk that affects one participant
Example: Corruption in a firm, fire, etc.

Question 5

Benefits of the risk management process

Answer 5

PRIORITY
* Predict and avoid surprises
* React quickly to emerging risks
* Improve business stability and quality
* Optimise returns and growth by exploiting risks
* Recognise aggregate risk exposure and interdependencies
* Implementing into business planning and decisions
* Trust: shareholders, credit rating agencies, regulators

Question 6

What should an ERM involve

Answer 6

CRAC
* Considering risks as a whole, not in isolation
* Recognise risks are dynamic and interactions
* Awareness of undiversified risk exposures for better capital allocation and business planning
* Capitalizing on risks by using insights to take educated risks and increase returns

Question 7

What are the requirements of a risk management process?

Answer 7

ICEEE
* Incorporate financial and non-financial risks
* Consider all possible constraints
* Evaluate all risk management strategies
* Enhance financial and operational efficiencies in business
* Exploit hedges and portfolio effects among risks

Question 8

Why is the risk monitoring step so important

Answer 8

• New risks
• Update risk management process
• Effective?
• Identify changing nature of risks
• Communication to shareholders

Question 9

What are the benefits of managing risks at the business level?

Answer 9

• Parent company decides on overall risk appetite and then divides this between business units
• Management of each business unit then manages the risk of the business within the allocated risk appetite
• Therefore each unit feels a sense of responsibility
• They are most closely involved in understanding the risks and how to deal with them