Market Risk Analysis Approaches Essay

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There are several approaches to risk analysis. At first, one should speak about the so-called value-at-risk (VAR) evaluation. This method is aimed at identifying the potential losses that can be incurred due to a certain event. Moreover, it is important to determine the probability of this risk.

In turn, this information is critical for developing the strategies of a business. Additionally, economists strive to take into account highly improbable events that can completely disrupt the long-term plans of various institutions. These events cannot be included in the VAR analysis. Additionally, various organisations consider the returns as one of the variables that should be incorporated in the risk analysis.

While evaluating risks, enterprises can apply different strategies. In particular, they can rely on historical information in order to determine the probability of a certain event and assess its impact. This approach can enable organisations to determine what kind of challenges businesses could face in the past.

Moreover, one can establish the patterns in the occurrence of these events. For instance, one can speak about the occurrence of economic crises. Nevertheless, this method cannot effectively analyse recent trends. In turn, one can speak about Monte Carlo simulations which can illustrate possible scenarios that a business can confront. Yet, this method can be effective if one can accurately determine probability distribution for various events.

It is possible to identify several risk management paths. For instance, one can speak about the steering framework which is aimed at identifying and avoiding various risks. As a rule, these activities are based on VAR calculations. Moreover, organisations try to take into account credit value adjustment assessment.

This approach helps the management understand various challenges that should be avoided. This approach enables financial institutions to get insights into the complexity of factors affecting these organisations. This is the main advantage of this strategy. Nevertheless, it does not enable companies to mitigate the impact of these risks.

Organisations may also focus on the prevention of risks and effective governance. In particular, they may try to impose restrictions on the risk-taking behaviors that can threaten the sustainability of the company. This method enables financial institutions to become more resilient to various stressors.

However, this approach may not show how different risks can be related to one another. This is one of the pitfalls that should be avoided. Overall, the strategy, which can effectively address various risks, should incorporate several elements. In particular, it should include VAR analysis because this method can highlight the main threats that the organisation should avoid.

Furthermore, the management should use Monte Carlo simulations since these tests can single out different scenarios that an enterprise should be ready for. Nevertheless, it is critical to identify events that can produce profound or catastrophic events on the company.

The main task is to strengthen organisational resilience to different stressors. Overall, more attention should be paid to good governance because this strategy can help the management avert various risks or at least mitigate their impacts. The management should set clear guidelines showing to what extent risk-taking behavior can be accepted.

This method is important for decreasing the exposure of this company to different stressors. The management should also monitor data that can indicate at inefficiencies within the organisation or significant trends in the external environment. These are the main techniques that should be adopted.

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IvyPanda. (2019, June 22). Market Risk Analysis Approaches. https://ivypanda.com/essays/managing-market-risk/

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"Market Risk Analysis Approaches." IvyPanda, 22 June 2019, ivypanda.com/essays/managing-market-risk/.

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IvyPanda. (2019) 'Market Risk Analysis Approaches'. 22 June.

References

IvyPanda. 2019. "Market Risk Analysis Approaches." June 22, 2019. https://ivypanda.com/essays/managing-market-risk/.

1. IvyPanda. "Market Risk Analysis Approaches." June 22, 2019. https://ivypanda.com/essays/managing-market-risk/.


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IvyPanda. "Market Risk Analysis Approaches." June 22, 2019. https://ivypanda.com/essays/managing-market-risk/.

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