Chapter 23 RISK MANAGEMENT. Abstract Even though risk management is the quality control of finance to ensure the smooth functioning of the business model and the corporate model, this chapter takes a more focused approach to risk management. | Chapter 23 RISK MANAGEMENT THOMAS Thomas Ho Company Ltd USA SANG BIN LEE Hanyang University Korea Abstract Even though risk management is the quality control of finance to ensure the smooth functioning of the business model and the corporate model this chapter takes a more focused approach to risk management. We begin by describing the methods to calculate risk measures. We then describe how these risk measures may be reported. Reporting provides feedback to the identification and measurements of risks. Reporting enables the risk management to monitor the enterprise risk exposures so that the firm has a built-in self-correcting procedure that enables the enterprise to improve and adapt to changes. In other words risk management is concerned with four different phases which are risk measurement risk reporting risk monitoring and risk management in a narrow sense. We focus on risk measurement by taking a numerical example. We explain three different methodologies for that purpose and examine whether the measured risk is appropriate based on observed market data. Keywords value at risk market risk delta-normal methodology delta-gamma methodology volatility component VaR historical simulation Monte Carlo simulation back testing risk reporting In recent years a subject called risk management quickly established an indispensable position in finance which would not surprise us because finance has studied how to deal with risk and we have experienced many catastrophic financial accidents resulting in much loss such as Orange County and Long Term Capital Management. Risk management as a broad concept consists of four phases risk measurement risk reporting risk monitoring and risk management in a narrow sense. We will discuss the four phases one by one mainly focusing on risk measurement. . Risk Measurement Risk measurement begins with identifying all the sources of risks and how they behave in terms of the probability distribution and how they are manifested. .
