Risk Management

Managing interest rate risk is very crucial for any institution whose balance sheet has a mix of Assets and Liabilities with different maturities. The recent financial crisis has demonstrated the grave interest rate risks that play havoc with the financial health of a company. The capital formation class has really helped me establish a broad based opinion on financial markets, their inner workings, influential factors (economic & non-economic), term structure of rates, long and short term debt instruments – treasuries, money markets, corporate and municipal bonds, Asset-backed securities, A/L management and various hedging mechanisms (derivatives) to reduce risk exposure, financial reform and future outlook for the markets. The class material was exhaustive, taught with current crisis perspective and allowed us to think beyond traditional ways. As part of this class, we did a paper on forecasting interest rates for a hypothetical company with a simple balance sheet (various short & long term securities), assessed Asset/Liability  risks, measured rate risk using GAP, duration, scenario analysis (including Black Swan events) and Value at risk methods and recommended hedging strategies to alleviate rate risk.  It was a very challenging engagement and I’ve really enjoyed every moment of it.

Paper1 – dealing with interest rate forecast for Hatchet Financial Co.

risk The ongoing turmoil in the financial markets has been blamed on the management failure to recognize the importance of sound risk management practices. Greed for profits drove management to indulge in over leveraging assets on the basis of faulty quantitative models which assumed the continuation of unrealistic economic prosperity. Everyone joined the race for the fear of being left behind. Even the most prudent, risk averse companies  deserted their corporate values in the race to harvest massive profits. With the fear of systemic failure gripping the financial markets, there is now a big push to emphasize and enforce Enterprise Risk Management (ERM) policies.  Here is an interesting article which talks about the urgent need for ERM in the financial services industry.

ERM push among banks