Chapter Twenty One

Combining the Products to Manage Risk: Risk Governance

WE HAVE DISCUSSED VARIOUS PRODUCTS to manage risk in Chapter 20. How do we combine these products to manage risk? What are the various things we can do to manage our risk? We explore the answers to these questions and other themes of risk governance in this chapter.

We see how different kinds of risks can be managed in different situations. These risks include:

  • Foreign exchange (FX) risk using spot, forward, options, and swaps
  • Rate risk using the yield curve instruments such as swaps and options and longer tenor funding
  • Funding and liquidity risk using long-term credit facilities and raising capital when possible
  • Credit risk using credit default swaps (CDSs) and other tools
  • Legal and compliance reporting using simple tools
  • Operational risk, which is covered in detail in Chapter 23 and in the “Operations” section of the Toolkit in Part Five

We also introduce some basic recommended tenets and put together the pieces from the arsenal to formulate strategies in Chapter 22.

DEVISING RISK STRATEGY USING PRODUCTS

The starting point of devising a strategy for risk governance, after the risks have been identified and measured, is to frame the objectives. Once that has been done and the metrics have been finalised (see Figure 21.1), the time horizon is frozen. As has been mentioned earlier, this horizon needs to be aligned with management time horizons. Then comes the task of short-listing the possible instruments ...

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