Derivatives have become the toolkit of today's risk management.
You take risks in whatever you do. But if you understand, measure and account for them, that should keep you out of trouble.
Dennis Weatherstone, Chairman and CEO
JP Morgan
Business Week, October 31, 1994, p. 90
I have no profit-and-loss agenda. I protect the chairman, the board and the shareholders.
Daniel T. Napoli, head of Risk Management
Merrill Lynch
Business Week, October 31, 1994, p. 89
I wanted to find a way to facilitate taking prudent risks, as opposed to just being a gatekeeper.
A common misperception about risk management in some quarters is that the use of derivative securities constitutes speculation - that is, the addition of financial risk to the business risk of a firm's operations. Some folks think that condom use increases risk.
The philosophy is, day to day, be relatively decentralized but have strong central guidelines on risk mandates.
We've seen situations where a company purged itself of derivatives and the result was even greater risk than it had before.
It [the futures market] is probably to our way of thinking the safest market in the U.S.
It's like location in the restaurant business. All I hear is risk management, risk management, risk management.
From reading the press recently, you could be forgiven for thinking that risk management is a new issue.
The inappropriate use of derivatives can threaten a company's rating. However, the absence of derivative activities also can increase the volatility of corporate cash flows as significantly as their speculative use.
Efficient risk sharing is what much of the futures and options revolution has been all about.
Derivatives are innovations in risk sharing, not in risk itself.
Risks can be managed with foresight. Damage can be controlled with hindsight. Your choice.
A bird in the hand approach is an apt way to describe the strategy of today's options investor. Taking the immediate income of writing a covered call, the battle-tested investor is strategically managing market risk.
Every business faces risks, much of which are unobvious, complex and dynamic. How well companies manage these risks could help separate the winners from the losers.
Risk management is state-of-the-art technology combined with some of the oldest tools in business - experience, judgement, common sense.
Risk management is a comprehensive process that combines philosophy, principles and methodology to produce a culture of risk management permeating the firm.
Measuring risk is essentially a passive activity. Managing risk is a proactive process, where, in dynamic markets, people are actively seeking to change their positions so that their institution has the risk profile they want it to have.
With derivatives products and options you can pick any point of the payoff distribution and sell off the others.
Our proposed risk management program, discussed below, not only protects the pump profit margins with a minimum amount of risk from the spot market, but also offers us an opportunity for extraordinary upside profit with no additional risk.
Fund managers who aren't using futures and options are dealing with an incomplete set of resources.
Risk, I had learned, was a commodity in itself. Risk could be canned and sold like tomatoes. Different investors place different prices on risk. If you are able, as it were, to buy risk from one investor cheaply and sell it to another investor dearly, you can make money without taking any risk itself.
We're not here to generate a profit. It's to be a partner with operating lines to manage risk. And we have heated and interesting discussions on the management of risk.
Risk management is somewhat like apple pie: we're all in favour of it so long as someone else does all the cooking and it comes free. But risk management is not a free lunch: and the more elaborate the pie, the more expensive it is.
Investment in derivatives should always be preceded by investment in controls.
Georges Clemençeau, French prime minister at the end of the First World War, once said: War is too serious a thing to be left to generals.' I consider risk management too serious to be left solely to risk managers.
Our most important risk management decision in trading is the hiring of our people. I can't emphasize that enough.
The Barings collapse has been one of the chief spurs to European and US banks to embark on firm-wide risk management projects.
Not managing risk is itself a risky option.
I think risk professionals often put too much emphasis on the 'hard side' of risk policies, systems and reports. We need to place more emphasis on the 'soft side' of risk management, such as people, culture, values, accountabilities and incentives."
Risk transparency should be one of three major objectives for any risk program, the others being risk mitigation and risk awareness. If you look at all the headline stories about derivatives and other major problems, a common component of each one is that bad news did not travel up. Almost any company that takes an honest look at itself internally will find specific incidents or episodes in which bad news did not travel up.
They're trying to convince us that risk management will become a science - plug in this number and that number - but I still think it is very much an art.
The greatest unsolved puzzle for risk managers and system designers remains the development of a suitable methodology for operational risk which can be integrated into their current approach.
(I)t is important to remember that million-dollar risk management and portfolio valuation systems - unlike used cars in many states - are not covered by lemon laws.
An operational risk officer without a clearly defined role is a walking, talking contradiction.
"The risk manager's job is not an easy role," this source added. "He or she has to call fire repeatedly and still be credible. Look at Long Term Capital Management. Are the managers all fools? No. It's easy to fault the risk management infrastructure, but it could be a function of risk appetite as well."
I think one of the best ways to improve operational risk management practice would be to compel eveyr member of the board to visit the back office. Just 10 minutes walking through it after the trading floors are empty, seeing the deplorable working conditions and noticing who stays late to sort out the failed trades and attempts to reconcile the trade tickets, should do the trick.
The risk manager's job is to be Banquo's ghost - appearing at the feast to give the revellers pause for thought.
Trying to control financial risks in this environment is like trying to hammer down one corner of a tent in a gale. But that's the nature of our business.
Risk management is like a piece of infrastructure, it is not an objective in its own right. When you are trying to make a business succeed, then you don't buy insurance against all eventualities.
A leading money center bank, well-known for its derivatives sophistication, notoriously used to employ a 'risk manager' whose main tools were a spreadsheet and a baseball bat.
Investors don't like to hear the word risk, unless you follow it with management.
There is a lot of risk we take
all day long that is not particularly quantifiable. You can
still get screwed even with good risk management.
Mike Riley
AMEX Specialist
Derivatives Strategy, July 2000, p. 22
Risk management is akin to a
dialysis machine. If it doesn't work, you might have a noble
obituary, but you're dead.
Ben Golub
Managing director and head of derivatives risk management,
BlackRock Financial Management
Derivatives Strategy, October, 2000, p. 26.
Risk managers are often portrayed
as the folks who make a living by saying "no.": "No, you
can't do that trade." or "No, you can't launch that product."
But the best risk managers contend that they actually make
their living by finding the right way to say "yes."
Yasuko Okamoto
JP Morgan
AsiaRisk, November 2000, p. 23
By definition, if you're looking for ships across a certain strip of ocean, the enemy will attack you somewhere else. That's the problem with risk management - what by definition can hurt you is what you expect the least, which is not the thing that people expect will hurt them.
Nassin Taleb
Derivatives Strategy, March, 2001, p. 20
... a company may die a quick
death if it does not manage its critical risks, it will certainly
die a slow death if it does not take enough risks.
James Lam
Enterprise: Risk Management
New York: Wiley (2003), p. 273
I think 'risk manager' is a misnomer. I don't manage the risks - it's up to the businesses to manage the risks. What we're here to do is to provide assurance that risks are being monitored and managed.
Kate Boothroyd
Head of Risk Management
AMEC PLC
Treasury and Risk Management, November 2004, p. 55
Financial risk management is not about avoiding risk. Rather, it is about understanding and communicating risk, so that risk can be taken more confidently and in a better way.
David Koenig
The Professional Risk Manager Handbook, p. xxiv, 2004
[T]oday's risk management systems are tomorrow's anachronisms.
Barry P. Barbash
Willkie Farr & Gallagher
Financial Engineering News, January-February, 2007, p. 5
A risk manager's job is to ensure that all risks are well-measured, well-understood and well-communicated.
Robert Berry
Goldman Sachs
Risk, January 2008, p. 48
Risk managers need to be perceived like good goalkeepers, always in the game and occasional at the heart of it, like in a penalty shoot-out.
Anonymous
"Confessions of a Risk Manager"
The Economist, 8/7/08
If you do not set an explicit risk appetite for the firm, it is meaningless.
Hugo Banzinger
Chief Risk Officer, Deutsche Bank
Risk, July 2008, p. 27
True risk management is creative - there is a judgment element to it. Scenarios need to reflect economic and political factors, as well as industry-specific issues. A widely experienced board of directors can bring that kind of insight into helping risk managers ask the right kind of questions."
Lawrence Dunn
RiskMetrics
Risk, July 2008, p. 27
A strong risk culture has many observable traits that fall under one of the following categories: vigilance, agility, communication, collaboration, discipline, talent, and leadership.
Dan Borge
Risk, June 2009, p. 57
(G)enuine risk management makes a neutral, well-informed assessment of the risk the business entails. It looks for ways to shed or mitigate the unwanted risks and to retain and manage only the risks that are necessary or desirable to take.
Dan Borge
Risk, June 2009, p. 56
Genuine risk management is not a technique or a rulebook: it is a way of life that only comes about through building a strong risk culture that enables and reinforces the right risk-taking behavior.
Dan Borge
Risk, June 2009, p. 56
Risk management discipline rarely made it into the chief executive's office or the boardroom, or into day-to-day business decision-making. We had the appearance of risk management without the reality of risk management so when we really needed it, it wasn't there.
Dan Borge
Risk, June 2009, p. 56
(R)isk management became an arcane cult that was never much more than window dressing in most firms that claimed to use it.
Dan Borge
Risk, June 2009, p. 55
In risk management, you're only as good as your weakest link, and unless you have firm discipline across the business, you get yourself into trouble.
Anonymous former senior executive of Lehman
Brothers
CFA Magazine, January-February, 2009, p. 33
It's not because people don't like risk managers. The reason they've been ignored is twofold. People have not put their own time and intellectual capital into understanding their products. There has also been an element of complacency because the market has been so benign. You can overload a boat as much as you want to, but if a storm comes, you'll be in trouble.
Anonymous former senior executive of Lehman
Brothers
CFA Magazine, January-February, 2009, p. 33
What should not be acceptable is simply ignoring how far current risk management information systems fall short of what is required until the next crisis drives the point home ... again.
David Rowe
Risk, March 2010, p. 91
Developing a risk management program without first properly understanding the value of assets to be protected is like building the top floor of a house without first establishing a solid foundation.
Cindy W. Ma
Risk Professional
June 2010, p. 35
If we set as our priority "the removal of all risk," we'll soon have sterile, stagnant, and unstimulating learning environments.
Ben Carson
Take the Risk: Learning to Identify, Choose, and Live with
Acceptable Risk
2009, p. 120
In many, if not most, circumstances involving risk management, completely objective measurement is clearly not possible, and thus a large element of subjectivity inevitably enters and often ends up, as it should, dominating the analysis.
Robert S. Kaplan and Anette Mikes
"Risk Management - The Revealing Hand"
Financial ManagementI 28 (Winter, 2016, pp. 8-18)
p. 9
Everyone does risk management in bad times. The strong test of risk management is whether it works in good times. Will top management stand behind the risk managers, avoiding temptation, and saying no to things that put the enterprise at risk?
Robert S. Kaplan and Anette Mikes
"Risk Management - The Revealing Hand"
Financial ManagementI 28 (Winter, 2016, pp. 8-18)
p. 15
Last updated: June 5, 2016