Introduction This paper is derived from a talk Tom Donahoe delivered at a fixed income mathematics conference at the New York Hemsley Hotel on January 8, 1996. The paper blends the informality of a talk with the practical insights of a veteran risk manager. I supplement some of my recommendations with a few war stories to give you a sense of how problems have occurred in the past. Keep in mind that derivative risk is only one of many business risks that firms must bear. It is a high profile risk that can severely impact the reputation of a firm.
Risk management includes the proper management of people and processes as well as data.
In reality, risk management remains, to a large degree, art and not science or pseudo-science as it is often portrayed. The old adage remains true, that if you torture the numbers enough, they will confess. We are not focusing on developing a single number to represent risk. Rather, we are looking to create a risk control environment.