Explanation:
The whole purpose of an ERM is to better aggregate risks across operations, units, or exposures. Although there are shortcomings with the VaR approach, it is the most appropriate answer to provide clarity on how to approach aggregation of risks at Best Bank.
(Book 1, Module 8.1, LO 8.a)
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Question 40
A risk analyst at Best Analytics has been charged with clarifying the benefits of an enterprise risk management (ERM)-based approach—as opposed to a silo-based approach—for a presentation to Best Bank’s management next week. His analysis includes formulating a clear understanding of aggregating risks across Best Bank’s operations. To best clarify the matter, the analyst's presentation should include which of the following?
A
A simple numerical summation procedure for aggregating Duration, Beta, and Delta exposures.
B
An explanation of VaR and its ability to integrate risks across exposures.
C
A disaggregation of balance sheet exposures to get to the main drivers of Best Bank’s operational exposures.
D
A recommendation on hedging a problematic currency exposure initiated by the South Pacific Regional Manager.
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