Chapter Twenty Two

Risk Management Governance Strategies

A RISK MANAGEMENT GOVERNANCE strategy—which covers the governance aspect in the company—consists of many elements. In this chapter, we discuss some of the strategies, with illustrative examples. In our discussion, we use the M-D-U (mandatory-discretionary-unhedged) proportion across each and provide a summary of each strategy with descriptions of the layering in practice.

KEY ELEMENTS OF THE GOVERNANCE STRATEGY

Some of the key elements of the governance strategy have been described in Chapter 19. To recap, these are:

  • Objectives
  • Scope and risk factors
  • Time horizons and tenors
  • Amounts
  • Tools and methods
  • Timing
  • Personnel

Objective

The objective of the risk management activity has to be defined up front. This is important since the selection of the entire mechanism for the governance will be based on this definition.

Scope and Risk Factors

The focus for each class of risk is the specific market factors and measures that will be managed for that asset class. The focus determines what to hedge—the scope and the risk factors to hedge.

Time Horizon and Tenor

The scope of the risk being measured in terms of time sets the tone for the focus, measurement, and management of the various risk elements. Sometimes these risks could be different for different asset classes. Some treasurers may also choose to look at different time horizons for different types of hedging—for example, focus on stability and visibility of cash flows in the ...

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