Risk is one of the major concerns for every firm. The increasing amount of risks in today?s market has increased the demand for risk measurement models and risk management tools by the day. Let?s have a look at some of the popular risk measurement models used in Enterprise Risk Management in this post.
There are two major models of risk measurement that are applied widely across firms within the space of Enterprise Risk Management; namely stated below.
- Structural Models
- Probabilistic Models
Structural Models: Structural Models are also referred as Deterministic Models as within these, clear cause and effect is defined. The outcomes are expected and probability of non-expected outcomes is not considered. For example, the rise in the interest rate will determine the revenue growth.
Probabilistic Models: Probabilistic Models also referred as Stochastic Models use observations to parametrize the data. These parameters are used in analytic models such as measurement of variance, correlations, etc. At times, one can also directly use the observations in a simulation such as the Monte Carlo simulation. These simulation techniques require several iterations and high computational power.
Besides these basic models, there are also various tools that are used in the risk management at a firm level. These tools are namely:
- Capital management
- Performance measurement
- Investment strategy
- Crisis management
- Contingency planning
- Business expansion strategy
- Distribution channel strategy
- Strategic planning
These are the major models and tools used in Enterprise Risk Management. To know more about risk measures and risk management, you can explore our training courses on Financial Risk Manager exam preparation. Simplilearn offers both online and classroom training courses on FRM Part 1 Exam prep.
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Source: http://blog.simplilearn.com/financial-management/risk-measurement-models-enterprise-risk-management
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