Chapter 1Crouhy - Business Risk

[Tania Pereira]

Please, Could you explain better what FRM hope us to know about Business Risk? Is the same thing that Basel II?

 

[ShaktiRathore]

Visit: https://forum.bionicturtle.com/threads/4-major-types-of-risk.6078/#post-19026
Basel is more concerned with regulations and is not same as business risk.
Thanks

 

[David Harper CFA FRM]

(Thanks you @ShaktiRathore !)

Although exact typologies vary, Crouhy is consistent with longstanding Jorion. I am going to copy Jorion's definition (VaR 3rd ed, Chapter 20) just because I think it's efficient, see below.

His firmwide breakdown is:

• Firm incurs either: business risks versus non-business risks
• Non-business risks are either financial or non-financial (e.g.., reputational)
• In this way, the FRM is concerned with non-business financial risks, but is neither really concerned with business risks nor non-business, non-financial risks. I hope that helps,

Jorion: "20.1.1 Business Risks Business risks refer to the risks the corporation willingly assumes to create a competitive advantage and add value for shareholders. These risks include the business decisions companies make and the business environment in which they operate. Business decisions risk include product-development choices, marketing strategies, and the choice of the company's organizational structure. Broader in nature is strategic risk, which reflects decisions made at the level of the company's board or top executives. Business environment risk includes macroeconomic risks, which result from economic cycles or fluctuations in incomes and monetary policies, as well as competition risk and technological innovations risk. Business risk is symmetric in that it can create both gains and losses. In some sense, corporations are "paid" to take business risk. Business risk can affect earnings if the institution does not react quickly to changing conditions. A key component of this flexibility is the cost structure. High fixed costs make is more difficult to adapt. Some institutions now give estimates of their business risk based on earnings at risk (EAR), defined as the worst fall in earnings over a 1 year horizon at a high confidence level." --- Philippe Jorion. Value at Risk, 3rd Ed.: The New Benchmark for Managing Financial Risk (p. 517). Kindle Edition.