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Role of risk management

  • Assess the risks faced by the firm
  • Communicate these risks to those who make risk-taking decisions for the firm
  • Manage and monitor those risks to make sure that the firm only bears the risks its management and board of directors want it to bear
  • In general, a firm will specify a risk measure that it focuses on together with additional risk metrics
  • (Example for risk metric is VaR)
  • When that risk measure exceeds the firm’s tolerance for risk, risk is reduced
  • Alternatively, when the risk measure is too low for the firm’s risk tolerance, the firm increases its risk

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