Risk Management for Financial Institutions

1.1 What is risk? usages of the term risk: Webster Risk is an exposure to loss, injury, or destruction. Knight Risk is an exposure to uncertain events with well-known probabilities, while uncertainty is the exposure to events with unknown or less well-determined probabilities (Knight; 1921). sources of uncertainty “The risk of higher oil prices. The risk of war.” math A risk is a random variable, describing the financial exposure of an economic entity to uncertain events. 1.2 The Historic View A sudden increase in financial market volatility 1971 breakdown of the fixed exchange rate system 1973 oil price shock, volatile interest rates The rise of financial derivatives 1972 FX futures traded in the “International Monetary Market ” (IMM) at the Chicago Mercantil