Who is finally in charge of the amount of residual risk

Smile risk: the risk of a change in an implied volatility parameter necessary for determining the value of an instrument with optionality relative to the implied volatility of other instruments optionality with the same underlying and maturity, but different moneyness;.

Correlation risk arising from multi-underlying European or American plain vanilla options, and from any options that can be written as a linear combination of such options. This exemption applies in particular to the relevant index options;. Dividend risk arising from a derivative instrument whose underlying does not consist solely of dividend payments; and.

Index instruments and multi-underlying options of which treatment for delta, vega or curvature risk are set out in MAR These are subject to the RRAO if they fall within the definitions set out in this chapter.

For funds that are subject to the treatment specified in MAR In cases where a transaction exactly matches with a third-party transaction ie a back-to-back transaction , the instruments used in both transactions must be excluded from the RRAO capital requirement.

Can hedges for example, dividend swaps hedging dividend risks be excluded from the RRAO? For the example cited, dividend swaps should remain within the RRAO. As per MAR The residual risk add-on must be calculated in addition to any other capital requirements within the standardised approach.

The residual risk add-on is to be calculated as follows. The scope of instruments that are subject to the RRAO must not have an impact in terms of increasing or decreasing the scope of risk factors subject to the delta, vega, curvature or DRC treatments in the standardised approach.

The RRAO is the simple sum of gross notional amounts of the instruments bearing residual risks, multiplied by a risk weight. The risk weight for instruments with an exotic underlying specified in MAR The risk weight for instruments bearing other residual risks specified in MAR Where the bank cannot satisfy the supervisor that the RRAO provides a sufficiently prudent capital charge, the supervisor will address any potentially under-capitalised risks by imposing a conservative additional capital charge under Pillar 2.

This website requires javascript for proper use. About BIS The BIS's mission is to support central banks' pursuit of monetary and financial stability through international cooperation, and to act as a bank for central banks. Cyber risk insurance is becoming a more and more attractive solution to the problem of residual risk management because it is quick and efficient to implement without undue disturbance to the operations of the enterprise.

It can be particularly attractive for smaller enterprises who do not necessarily have the resources to undertake the possibly onerous investigations and analyses associated with risk reduction and avoidance measures.

Although cyber security insurance is at its beginnings, it is increasingly occupying a well-defined niche in the overall cybersecurity risk management process.

By adopting the systematic approach outlined above to the management of residual risk, management ensures that nothing is overlooked in the search for the best solution that not only mitigates negative risk, but also maximizes positive risk opportunities and safeguards the bottom line of the company.

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Skip to main content. Search form Search. Create new account Request new password. Home » Residual Risk. Residual Risk As we discussed in the context of an overall cybersecurity risk management process , there are four major steps: Identify risks Assess risks Identify possible mitigation measures Decide what to do about the residual risk Let us concentrate now on the last point.

This is a test summary for a blog post. Inherent Risk vs. Here are the standard definitions of the two concepts: Inherent risk represents the amount of risk that exists in the absence of controls. Residual risk is the amount of risk that remains after controls are accounted for.

Sounds straightforward. But these two terms seem to fall apart when put into practice. According to Jack Jones, author of Measuring and Managing Information Risk: A FAIR Approach and creator of the FAIR model, much more realistic and useful definitions would be Inherent risk is current risk level given the existing set of controls rather than the hypothetical notion of an absence of any controls.