Are senior managers and the board of directors kept abreast of the financial exposures facing the company at any one time?
The best summary measure of market risk is a value-at-risk number. (See sub-head ‘market risk’ in the answer to question #11 for explanation and caveats.) The market risk number must include all types of financial instruments, i.e. cash and derivatives. Because market risk is made up of different risk classes - i.e. interest rates, foreign exchange, equity and commodity, the summary VAR number can be decomposed into a VAR for different asset classes. This enables senior management to see to which asset class the firm is most sensitive and to take corrective action if it does not approve of the risk profile.
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13 Questions on Risk Management