Risk Management

Risk management is the identification, assessment, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives, whether positive or negative) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities.

Risks can come from uncertainty in financial markets, project failures (at any phase in design, development, production, or sustainment life-cycles), legal liabilities, credit risk, accidents, natural causes and disasters as well as a deliberate attack from an adversary, or events of uncertain or unpredictable root-cause.

Financial risk management

Financial risk management is the practice of creating economic value by using financial instruments to manage exposure to risk, particularly credit risk and market risk. Other types include Foreign exchange, Sharpe, Volatility, Sector, Liquidity, Inflation risks, etc. Similar to general risk management, financial risk management requires identifying its sources, measuring it, and plans to address them.

Financial risk management can be qualitative and quantitative. As a specialization of risk management, financial risk management focuses on when and how to hedge using financial instruments to manage costly exposures to risk.

Essentially, risk management occurs anytime an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment and then takes the appropriate action (or inaction) given their investment objectives and risk tolerance. Inadequate risk management can result in severe consequences for companies as well as individuals. For example, the recession that began in 2008 was largely caused by the loose credit risk management of financial firms.

Simply put, risk management is a two-step process – determining what risks exist in an investment and then handling those risks in a way best-suited to your investment objectives. Risk management occurs everywhere in the financial world. It occurs when an investor buys low-risk government bonds over more risky corporate debt, when a fund manager hedges their currency exposure with currency derivatives and when a bank performs a credit check on an individual before issuing them a personal line of credit.

Risk management with StatPro

At StatPro, we understand a certain level of risk is essential to any investment strategy but equally essential is managing this risk. With StatPro’s risk management software, an investment manager can have a transparent view of risk for portfolio construction, regulatory requirements, and investor relations.

StatPro provides a standard measure of risk and volatility, and we have also pioneered many enhancements that will help managers isolate critical drivers of risk. We employ advanced models yet present the results in a highly transparent and intuitive interface that can easily be digested by both sophisticated practitioners and concerned investors.

StatPro Risk Management (SRM) is a comprehensive, web-based portfolio risk analytics tool. It covers a wide array of global assets, covering the following asset classes: Fixed Income, Equity, Funds, Currencies, Commodities, Simple and Complex Derivatives, OTCs, Structured Products. SRM’s Single Integrated Framework captures the complex relations among market risks, default risk and default correlation risk. SRM provides Multiple Ex-Ante Risk Measures including Value at Risk (VaR) and CVaR (Expected Shortfall), Potential Gain, Volatility, Tracking Error and Diversification Grade. It also provides Liquidity, Stress Test and Sensitivity Analysis.

StatPro’s risk bureau service can take the hassle out of risk management reporting. The service provides asset managers with a complete illustration of the risk factors in their strategy, cost- effectively and in an easy to understand format enabling you to:

  • Comply with the risk management requirement of UCITS IV regulation.
  • Reduce your workload
  • Ensure you have an understanding of your sensitivity to key risk factors, including volatility, currencies and inflation.
  • Calculate the cost of liquidating key positions.
  • Analyze the key drivers of each position’s valuation and expected profit or loss under different scenarios.
  • View how your funds will perform under historical or engineered conditions.

The risk management feature within StatPro Revolution enables users to oversee the risk and exposure of selected portfolios. For those with UCITS funds this will aid compliance with the UCITS IV regulation. Using the VaR methodology, this daily tool enables users to complete the following, as requested by the European Union on collective investments without the hassle of further implementation:

  • establish, implement and maintain a documented system of internal limits concerning the measures used to manage and control the relevant risks
  • conduct a rigorous, comprehensive and risk-adequate stress testing program
  • monitor the accuracy and performance of its VaR model, by conducting a back testing program
  • comment on and export daily risk reports, breaches and warnings
  • compute the leverage
  • monitor the liquidity risk of the assets included in the portfolio

StatPro partners with many firms, large and small to enable risk reporting internally and externally.

“Risk management has become a key priority for financial institutions. We chose StatPro’s risk management API to improve our existing offering in risk reporting management. Integrating risk reporting within the OLYMPIC Banking System middle office enables us to help customers who are looking to enhance their processes in this area.”
Jean-Philippe Bersier, Director of Business Development, ERI Bancaire.

More information about risk management from StatPro

White papers:

  • How sharp is the sharpe ratio? Any discussion on risk-adjusted performance measures must start with the grandfather of all risk measures the Sharpe Ratio or Reward to Variability which divides the excess return of a portfolio in excess of the risk free rate by its standard deviation or variability

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