Risk management (ch24)- cherry picking, aka A15 Paper 1, 4iii

[Furiously_treading_water]

I'm really struggling with the risk section overall, but here's my question for today...

In this case, I'm looking at A15 Paper 1, 4iii. In ActEd's model answer, from the risk management process they pick out Identification, Mitigation/Control and Monitoring.
What happens to the other 3 steps (classification, measurement, financing)? Is it a logical step to ignore these because it's a 6 mark question, or because there's not a lot to say on those steps?

 

[Lindsay Smitherman]

Hi - Q4 on this paper is principally about derivatives (from the investments part of the course), with part (iii) asking about how the futures exchange can manage its risk exposure.

You therefore need to start by demonstrating that you understand that the key risk exposure for the exchange is counterparty failure. Most of the solution will then be about how the exchange goes about managing its exposure to that risk: through mitigations and controls.

The question isn't asking about an entity undertaking a full risk management process: it is testing your understanding of derivative counterparty risk and how that specific risk is managed. ASET suggests that the risk management control cycle could be used - as a way to help think of things to write about to gain breadth in the answer, eg maybe it would help you remember the need to monitor changes in the exposure.

I guess the solution does effectively touch on 'classification' (the key risk is a counterparty risk) and arguably also 'financing' (through the use of collateral) - but as is often the case, there is generally more to write about in relation to controls.