Quality and appropriate risk monitoring is a key element of the risk management process. Managers are expected to define their risk appetite and how it translates into exposures, leverage, concentration, market, counterparty and liquidity risk limits. Risk modelling and reporting require complex tools and sophisticated methodologies, even for relatively simple instruments and strategies.
It is critical to model and monitor risk both in normal and abnormal market conditions, in particular through:
- Exposures and Sensitivities (equity, rates, FX, credit, spread, inflation, etc.)
- Global exposure/value at risk and related measures such as Risk Contribution of individuals’ positions, subset of portfolio, top contributors, etc.
- Historical stress and scenarios analysis
- Credit Risk and counterparty concentration
- Liquidity profile and alignment
Risk monitoring is an exercise that requires sophisticated modelling and often the use of a third party solution. It is very important to be able to choose the right solution, which requires understanding the requirements for a risk system, assessing the methodology used and whether it is adequate to the type of instruments and strategy involved as well as performing ongoing model testing.