Risk Mgmt and Capital Requirements in Banking
Lecture 3.1 Vorlesung 19.02.2014
Lecture 3.1 Vorlesung 19.02.2014
Set of flashcards Details
Flashcards  31 

Language  Deutsch 
Category  Finance 
Level  University 
Created / Updated  20.02.2014 / 24.04.2014 
Licencing  Not defined 
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According to Donald Rumsfeld there are risks that are known knows, known unknown and unknown unknowns. What is the meaning of those phrases?
known knowns = risk we know and can measurable
known unknowns = risk we know, but not measurable
unknown unknowns = risk we don't know and therefore not measurable
According to Neumann  Morgenstern
1. Which shape has an utility function for risk aversion?
2. Which condition has to be exist regarding utility of expected value and expected utility?
1. concave
2. U(E((x)) > E(U(x))
According to Neumann  Morgenstern
1. Which shape has an utility function for risk neutrality?
2. Which condition has to be exist regarding utility of expected value and expected utility?
1. linear
2. E(U(x)) ? U(E(x))
Which are the 4 Axioms of Expected Utility according Neumann  Morgenstern?
1. Completeness
2. Transitivity
3. Continuity
4. Substitution
What does the Allais Paradox describes?
Decision1: Choose between (A) an 80% chance of $4000; (B) $3000 for sure.
Decision2: Choose between (C) a 20% chance of $4000; (D) a 25% chance of $3000.
Which axiom is violated?
unsufficient description of human behavior towards risk.
B over A; C over D > result violates the substitution axiom (= common ration effect)
From decision1 to decision2 one goes from a certain to a uncertain situation. In this case certainty creates additional value.
What is the statement of the Asian Disease Example?
People act riskaversely when dealing with gains/profits.
People are getting riskier by dealing with losses.
Market Risk
1. Potential of loss because of unexpected changes in market prices
2. generally symmetrical distribution
Example: Depreciation of USD leads to decline in the CHG value of USD assets.