RISK MANAGEMENT - Essay Example

Strong leadership defines the risk culture and shares that vision with management. Leadership acts as if it believes in its vision. In the feedback cycle, leadership listens to new risks identified and responds with a course of action consistent with the culture of risk. (Marks and Rassmussen, 2010) (Hopkin, 2010) Management commits to the leadership vision and manages to that standard. Teamwork is essential throughout the workforce and it is management that provides the regulation of the team.

Management trains employees to respond properly to risks, for example, wearing safety equipment or using machinery correctly. Management monitors the results of risk management tactics and accounts for poor risk taking behaviors. Management establishes quantitative analysis tools to measure risk culture compliance. Any problem areas are reported to leadership, discussed and a mutually agreed upon intervention occurs. (Marks and Rassmussen)(Hopkin, 2010) Strong financial risk cultures identify key risks inherent in the business; these may include currency exchange, interest rates, diversification issues, fluctuating suppliers’ prices and raw commodity pricing.

The key financial risks order by primacy from largest concern to least impactful. The financial risk manager reviews the company risk tolerance and manages the priorities accordingly, implementing strategies and tactics to reduce risk where desired. These tactics usually involve the derivative markets, like interest rate swaps and commodity trading. Risk management is a repetitive process, so the financial risk manager monitors the markets of concern and refines his strategy as needed. (Horcher, 2005) (Das, 2006) Operational risk management concerns both management and measurement of risk.

Traditionally, operations risk management involved all the company processes and systems, all employees for management and training, and any external event, such as political interference. A strong culture identifies, measures and implements a strategy consistent with overall company goals. Of course, on-going stewardship is required as with the financial risk management. (Abkowitz, 2008) Weak Risk Culture Weak risk cultures begin with resistant leadership, sometimes arrogant leadership. Management is either not told goals or communications are not transparent.

Leadership and management must believe in and be committed to the same vision of risk culture. New risks are not identified on a timely basis, on-going stewardship is an essential part of a strong risk culture. Underutilizing personal or improper training creates a weak risk culture operationally. Only considering risk avoidance and mitigation rather than proactively seeking profitable means to deal with risk is a characteristic of a weak risk culture financially. For instance, trading in derivatives can be profitable by trading risky interest rate situations for more time sensitive hedges.

Weak risk cultures do not do what strong ones do. (Anderson and Schroder, 2010) Risk-Return/Risk-Reward The financial risk manager observes the risk-reward behavior of financial instruments in order to determine the least risk available for the highest return. If all instruments shared the same risk, the investor would choose the highest reward. If all risks had the same reward, investors would choose the lowest risk. This balance is achieved through diversification of investments and managing the volatility of an investment