ABSTRACT

We begin by understanding the products and how they behave, together with the processes, systems and infrastructure that are used to support them. Some assumptions are made about the dynamics of the variables of interest to produce a risk model. e model is calibrated on the basis of available data. Lower-level risk metrics are designed to capture the likelihood and impact of possible situations in which money could be lost. Next, higher-level risk metrics are produced by aggregating lower-level measures from di erent areas of the rm. e risk model is documented and validated. e rm’s risk appetite is de ned at various levels and risk reporting is designed on the basis of metrics available. e output of the risk measurement process is monitored regularly, and action to modify the rm’s risk pro le is taken as needed on the basis of its articulated risk appetite. Capital allocation and performance measures are derived from the risk measures. Finally, the performance of the whole framework is monitored; it is regularly audited and enhanced as needed.