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QUESTION 1 MID-SEMESTER EXAM: ESSAY [50 MARKS OUT OF 100 MARKS TOTAL] EFN505: FINANCE RISK MANAGEMENT SEMESTER

2, 2013 Background: As financial instruments become more integrated and competition increases, financial institutions need a clearer understanding of the risks they are taking to protect their assets. It is the risk manager's job to foster this and develop system-wide risk awareness. Brought about by Basel II, financial institution must set aside capital reserves for market risk, credit risk and operational risk. Their main goal is not to eliminate risk, but rather to be proactive in assessing risk for their own survival. While this is clearly a worthy aim, the implementation of formal risk measurement is far more difficult than what academics tell us, this is evident from the sub-prime crisis. The reasons fall into several main groups. First, risk only matters when looking into the future, but measurement is done looking at the past. Surely, we must be missing something! Second, most finance practitioners think about cause and effect in a simple linear way. In reality, most processes are highly non-linear, making the actual impact (X) of an event () on the process, difficult to model. As evidenced by the sub-prime crisis, even a few very small correlated events can have huge impacts on where you end up. Third, if small events can have large impacts on complex systems, then even knowing 99 per cent of what you need to know may leave you vulnerable to large errors. And 100 per cent knowledge is simply impossible! Finally, most economic systems respond spontaneously what happens is influenced by how we perceive what will happen a behavioural aspect that we have not yet even started to model. In light of the above and given the numerous simplifying assumptions that finance practitioners always impose to make their risk models tractable we simply may not be measuring anything about risk and we may well need to change what we believe in. Objective: The aim of this essay is to develop your critical thinking skills by engaging with and responding to theoretical and practical issues in risk measurement.

Task: Your task is to write an opinion piece for The Australian Financial Review entitled:

Everything You Think You Know about Risk Seems Unhelpful and is Probably Wrong.
The essay should be no longer than 1200 words long and must be uploaded as a Microsoft Word document (StudentName_StudentNumber.docx) on Blackboard. References should appear in endnotes to the essay. Include in your submission a one-page self reflection where you reflect on your learning when writing this piece, including sourcing and assimilation of literature, critical thinking and organising your thoughts. Due Date: Week 6: Friday 30 August 2013 at 6 pm (upload on Blackboard)

How to write a killer opinion piece: http://www.writersdigest.com/writing-articles/by-writing-goal/improve-mywriting/10-rules-for-writing-opinion-pieces http://www.atlanticcommunity.org/index/view/How_to_Write_a_Convincing_Opinion_Article http://nadabs.tripod.com/writing/#process or ... simply put how to write an opinion piece into Google and you will find lots of helpful tips.

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