Effective Risk Management is a complex system which impacts the whole of the organization
To measure risk effectively and accurately, the company must have accurate and timely information as to its positions, its counterparties as well as the relevant market analysis data. As market conditions change, the value of the organization's and its customers' positions changes accordingly, either favorably or unfavorably. Effective risk management is an ongoing process, which ensures that accurate risk measurement information is available to the right people on a permanent basis. Unlike some operational processes, an effective and relevant risk management strategy affects the entire organization and may have diffuse benefits. Therefore, it can be difficult to limit the scope of such strategy development project.
Powerful and efficient risk monitoring tools and systems help the company's management to develop a proactive approach to risk-related issues. The risk management strategy provides necessary information for more timely and reliable decision-making. This strategy ensures that managers at every level are ready to take appropriate actions, if a condition exists that warrants attention (it should be noted that not every risk condition or situation requires action).
The key concept of any risk management strategy which could be adopted in an organization is Value at Risk (VaR). The concept of Value at Risk, based on a set of measurements, has become the industry benchmark for risk reporting. Value at Risk allows the company management to estimate the most important aspect of risk, namely the loss such that an organization can suffer within a certain time horizon (a day, a week, a month, etc.) at a pre-specified probability level.
The first stage in the development of an organization's risk management strategy, as in any major project, is a clear definition of the organization's objectives and the scope accompanied by a statement of the anticipated benefits. The clearer and simpler the objectives, the better the end result. The risk management strategy may involve the following types of risk: Financial Risk, Business Risk, Liquidity Risk, and Political (Foreign Exchange) Risk.
As most other business processes, risk management is a living system. As a living system, it can be structured around a set of standard system components. For instance, the organization's risk management strategy can be based on seven typical components, which involve the following areas for comparison: Inputs (expenditure on risk management, management time spent, related insurance expenditures, compliance time and effort, external advisors and costs); Processes (risk identification, risk assessment, risk management implementation, risk audits, risk transfer and financing, modeling, documentation, education); Outputs (numbers of risk assessments, training days, scale of communications and other metrics associated with the project efficiency); Feed-back (effectiveness measurement and reporting, outcome measures, risk reduction or mitigation measurements, reductions in the cost of risk, event and impact comparisons, testing wider awareness in the organization); Feed-forward (targets and objectives, motivati ona
l structures, risk-based planning, event horizon scanning); Monitoring (target and objective setting, structures assessing payback, communications and briefings); Governance (risk strategy setting process, organizational inclusiveness in decisions, seniority of governance, independent reporting routes to the board, policy inhibitors, policy trends, etc.).
Finally, the use of a coherent risk management strategy allows the company to identify the risk-related issues and take proactive financial and organizational measures to mitigate the risk.
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