FERM - Ch.16: Responses to Risk


#1

A Fellowship Forums Wiki Community Post

Online Link to this Reading: N/A

Topics Covered in this Reading:

  • Introduction

    • Risk Reduction
    • Risk Removal
    • Risk Transfer
    • Risk Acceptance
    • Good Risk Responses
  • Market and Economic Risk

    • Policies, Procedures, and Limits
    • Diversfication
    • Investment Strategy
    • Hedging Against Uncertainty
    • Hedging Exposure to Options
  • Interest Rate Risk

    • Direct Exposure
    • Indirect Exposure
  • Foreign Exchange Risk

  • Credit Risk

    • Capital Structure
    • The Volume and Mix of Business
    • Underwriting
    • Due Diligence
    • Credit Insurance
    • Risk Transfer
    • Credit Default Swaps
    • Collateralized Debt Obligations (CDO)
    • Credit-Linked Note
  • Liquidity Risk

  • Systemic Risk

  • Demographic Risk

    • Premium Rating
    • Risk Transfer
    • Diversification
  • Non-Life Insurance Risk

    • Premium Rating
    • Risk Transfer
    • Risk Modification
    • Diversification
  • Environmental Risk

  • Operational Risk

    • Internal and External Fraud
    • Employment Practices and Workplace Safety
    • Clients, Products and Business Practices
    • Damage to Physical Assets
    • Business Disruption and System Failure
    • Execution, Delivery, and Process Management
  • Different Definitions of Operational Risk

    • Crime Risk
    • Technology Risk
    • Cyber Risk
    • Regulatory Risk
    • People Risk
    • Legal Risk
    • Model Risk
    • Data Risk
    • Reputational Risk
    • Project Risk
    • Strategic Risk

This is a wiki post, editable by anyone. Feel free to edit and add key points/extra detail above!


#2

Can someone please explain in layman’s terms how the SPV works? My impression is that:

  • As an entity, it purchases bonds/mortgages/etc
  • External investors fund the SPV, and purchase “shares” (tranches) of different classes with different risks/returns associated.
    Is this correct? Also, who sets up / regulates the SPV?

#3

Hi @gojetsgo,

I don’t have too much experience with SPVs but I believe one of the primary reasons companies establish SPVs is for risk sharing purposes. For example, if Apple was investing in a new higher risk technology, they could create an SPV which is an off book entity to fund and take on this risk. If the SPV and the new venture ends up failing, the parent entity Apple wouldn’t have to recognize the SPVs losses on it’s balance sheet. Because it is a separate legal entity, it isolates the risk, protecting the parent company from the SPV losses.

Anyone else have anything to add?


#4

I am confused about the bias risk, Can somebody could explain this risk with more details?


#5

@yywq90 Try explaining this risk in your own words, and I challenge you to try and make up an example. Once you think about it and apply it, I can try to chime in to clarify the concept.