Market liquidity and performance measurement process
In order market liquidity and performance measurement process capture the benefits of an effective risk management, it must be integrated into the strategy and business processes.
In a volatile world, risk management is a valuable differentiator that uncovers and utilizes premia associated with risk. This process in particular improves the profiling of risks that hitherto have been considered too difficult to quantify, e.
For these cases the quantification process includes multiple estimates from different profilers which greatly reduces the overall estimation error. Furthermore, all estimation errors are retained throughout the quantification and aggregation process, further reducing the influence of estimation uncertainties in the final aggregated results mathematical 'Law of large numbers'.
The whole process guarantees precise risk figures that also cover risks market liquidity and performance measurement process hitherto have been considered too difficult to quantify. Exceptional Monte Carlo performance is an important determinant of professional risk management, since about risks already lead to more impact scenarios than there are atoms in the universe see 'System'.
This 'risk-adjusted strategy' extends conventional strategy with the effects of uncertainties and associated risk premia that are connected with decisions based uncertain future developments.
Given an analysis of the risks, opportunities, and associated premia, the risk strategy determines the objectives of risk management, i.
For example, for an industrial company, the aim is often to take risks in the area of its expertise and to hedge exchange rate or commodity risks i. Many companies are aware of their risk exposures but do not know how much risk to take. Accepting or insuring all risks or treating risks indiscriminately is almost certainly not an optimal risk strategy. The optimal risk strategy lies in between and can be derived from:. A closely related topic is risk-adjusted performance measurement.
For example, resources and incentives should be allocated on a risk-return basis and not just on a return basis. Allocation on return basis would reward business units with high yields and large risks, simply because it does not consider losses on corporate level when a business unit defaults.
A business unit has to be charged a risk premium that covers the losses a business unit can create in its corporate environment which can be regarded as market liquidity and performance measurement process premium'.
These premia usually depend also on the nature of the businesses through betas. The risk strategy can also define the acceptable risk exposures risk limits for all business units of the company and can determine market liquidity and performance measurement process risk premium based resource allocation among those business units. Industrial companies are often exposed to risks triggered by financial market fluctuations and default on receivables. These risks have an impact on corporate earnings and liquidity, and, in extreme cases, can even pose a market liquidity and performance measurement process to the existence of a company.
Financial risks management embraces the management of the following risks:. Financial risks management thus requires an enterprise-wide risk management. Corporates can only make executive decisions as to which risks they wish to bear and which risks to avoid if they are in a position to judge the scope of risks in question and the potential impact of the risks in question on planned earnings or liquidity.
By employing customized financial products, it is possible to reduce such risks to an appropriate level. Liquidity management or liquity risk management aims to protect the liquidity of a business at minimum costs. Liquidity risks embrace all risks that threaten the liquidity of a company.
Liquidity management thus requires an enterprise-wide risk management with market liquidity and performance measurement process modelling capabilities but offers large diversification premia. An effective management of risks associated with the uncertainty of future commodity prices is generally cheap due to the abundance and liquidity of traded products.
An important prerequisite is a faithful modelling and measurement of corporate exposures. Credit risks depend primarily on the creditworthiness of the individual debtors. Evaluating the default probability attached to individual debtors and taking into account correlations in the receivables portfolio, enables corporates to evaluate and manage these risks. A number of new products facilitating the management of credit risks have appeared on the market over the past few years, e.
These products are valuable as long as their inherent risks are dominated. Proper risk management should consider the derived risks that arise from such products see subprime crisis.
Consulting Corporates Enterprise-wide RM. Risk-adjusted Planning Forecasting, Simulation, and Planning. Use of this website signifies your agreement to the Terms of Use.
Furthermore, the asset issuer has burnt 2. This means that it looks at the order book and observes where the orders are thin. Unlike traditional brokers, they do not charge commission on trades or require a minimum account balance. com.