FERM - Ch.16: Responses to Risk



Reading Source: Textbook - Financial Enterprise Risk Management

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
    • Diversification
    • Investment Strategy
    • Hedging Against Uncertainty
    • Hedging Against Loss
    • 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
    • Diversification
  • Operational Risk
    • Business Continuity Risk
    • Regulatory Risk
    • Technology Risk
    • Crime Risk
    • People Risk
    • Bias
    • Legal Risk
    • Process Risk
    • Model Risk
    • Data Risk
    • Reputational Risk
    • Project Risk
    • Strategic Risk
  • Further Reading


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?


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?


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


@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.


Hi There,

I am confused with this sentence in the Financial Enterprise Risk Management Ch. 16 on Capital Market Risk Transfer

“Issue a put that allows the company to raise capital at a pre-determined price in the event of a pre-specified catastrophe”

How does this transfer risk? How is this a form of securitization?

Any insight would help!



Good question.

A put option gives you the right to sell an asset at a pre-determined price. If I buy a “catastrophe put”, the trigger event would be a catastrophe, and I would then have the right to sell my own shares (to the seller of the put option). This can be used to raise capital in times of a catastrophe because I know I would be able to sell shares of my company for cash when I would need it most.

Does that make sense?


Yes, Thank you!