Key Learning Points: Lesson 11
- Catastrophic losses in the financial industry were caused by trading in risky financial derivatives.
- Similar themes and events existed among them all.
- A system of risk controls was established within the financial community to better monitor and quantify this trading activity.
- “Mark-to-market” gives the current value of all “open” trading positions based on daily market prices.
- “P&L” is the estimated profit and/or loss determined by the mark-to-market calculations.
- “Value @ Risk” (VaR) is a theoretical measure of the maximum potential loss for a trading book.
- Corporations face various risk exposures. Among them are:
- Publicly-traded energy companies engaged in trading financial derivatives were required to implement risk controls by FY2000.
- Companies need to have a defined risk control structure in-place including:
- standard risk metrics;
- daily reporting requirements;
- risk policies and procedures;
- violations reporting;
- independent risk control staff headed by a chief risk officer;
- risk oversight committees comprised of top executives.
- Lesson 11 Quiz
- Lesson 11 Case Study Activity
- Fundamental Factors
Reminder - Complete all of the lesson tasks!
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