Operational Risk Scenarios Analysis - Essay Example

Operational Risk Scenarios Questions Why the following Operational Risk Scenarios should have no Impact on the Capital There is no professional investment that would intentionally make investment error or a trade error. However, such trade errors occur mostly. One of the decisions a firm/ business enterprise requires is whether there is a need to open an error account that is separate. However, in all the efforts always need to be made to have double-checked and check entries before the trade button are pressed but in one point or the other a trade error occurs. Perhaps, as long as trading has been there must be trading errors. For instance, back during the days of outcry, orders used to circulate from the customers to the hands of brokers to went to the floor desk to the order desk to the executing broker to the runner and then back again, and therefore errors used to be common(Sykes, 1983). In reality, this errors cannot have an impact on the capital today. The moment an error is discovered, and as well the market is still open, it is just the role of the order desk to get out the error and finally, need to determine the fault. However, determining fault is usually easy. Perhaps, double-checks in the system should be there, primarily composed of the telephone recordings as well as duplicate orders that will tell the story. In addition, it should not have absolutely impact on capital because the moment it was determined that the broker-agent, or customer, or even the floor broker was the one at fault, they could ate the error. Also, incase the error happened at any other place in the process, and then the clearing firm needed to swallow the loss (Jackwerth& Rubinstein, 1996). The function that insurance can perform in reducing the capital impact of operational loss of a firm is highly significant. Transferring a certain risk to an insurance firm can lead to a better performance hence covering diverse losses and prevent critical situation. It has been approved that insurance can be applied as a mechanism to minimize the impact of operational losses for firms like banks, and this means that a specific insurance against risks can result to a low level of minimum capital that is allocated to a given risk category (MacMinn & Richard, 2005). In hard economic moment, organization tend not be affected as such. With the financial crisis, it has been reported on ways firms employ strategies in order to cope up with the difficulties that inevitably follow crisis in economic (Douglas& Browne, 2011 ). Scenario analysis is a strategise tool in making decision. However, it has been applied for most decades in different disciplines, that include management, defense, finance, engineering, medicine, and economics (Mulvey &Erkan 2003). When systematically and properly applied, scenario analysis could reveal most significant aspects of a scenario that will be otherwise missed. Provided the current entity state, it attempts to navigate situation as well as events that can impact significantly on features of entity in future (Dutta & Babbel, 2012). Therefore, scenario analysis has two elements that are important: Evaluation of the future possibilities with respect to a given characteristic. Present state of that characteristic for a given entity. In the market risk management, scenarios serves an important function. Most scenarios on the asset future state are most actively traded within the market, and can be used for managing risk. Therefore, this proves that Market downturn cannot impact on the capital. Explain why the following Operational Risk Scenarios may affect the Capital The majority of firms might not have enough information that is required. They cannot asses as well as mitigating risk until they are once exposed to the risk that can lead to capital loss, and this is due to lack of enough literature about the market. Third parties can expose a company to risks this is because they can expose their clients to a wide range of risks. In addition, even if the a third party which can be an organization is well known, lacking reliable information on kind of risk such parties run can affect the capital of a firm or even organization (Heide & John, 2002). It has been significant to pay attention to intermediation institutions informational while studying the market. One of the most serious problems of a market is asymmetry of information between a borrower and lender. The variables in the capital market can include interest rates that are the cost of capital, as well as the agency costs, and this can significantly affect impact on the governance corporate, and therefore impacting on decisions concerning capital budgeting. However, there are two key sources of capital debt and equity (Semenova, 2008). Debt can be an external source of capital that bears a well-specified interest rate. Also, it is mainly supplied by the capital markets including investment banks, commercial banks, as well as other financial institutions, for instance, insurance companies, and superannuation funds. The company that borrows and the financial institution that lend can enter into a contract that specifies the interest rate which needs to be charged as well as other restrictive debt conditions that have to be observed in an event of the life debt. In addition, through the charges of interest and other conditions that are imposed on the borrower or investor, capital markets can significantly influence the firm’s corporate/organization governance , costs agency and decisions concerning capital budgeting. Therefore, lacking information such as the making capital market interactions can have a significant impact on capital. The United States is not only the territory where individual can wonder about data protection levels but also in Europe series of most leakage data and data theft cases have always hit the headlines. The United Kingdom HM Revenue & Customs Department did confirmed in the year 2007 that two of its computer discs that contained the whole of child benefit database of close to 25 million persons was lost. It confirmed that the personal and confidential details on the discs included ages, bank, names, and address details. In the year 2008, one of the biggest banks in Europe, that is the Bank of Ireland, reported to losing four laptops that was containing up to 10,000 records of its customer. In addition, the four laptops contained very sensitive information for instance, information needed to get a formal proposals for retirement funds, life insurance, and bank accounts, therefore, covered most details requiring to fake identity of someone (Phna, 2009: Kannan, Jackie, & Sanjay 2007). However, the value is typically linked to the harm that will result should the data get into the wrong hands. Generally, data that pertain to identity of someone or to company trade secrets is termed as most confidential. This will also include information such as firm strategies for instance,(go to market strategy for a brand products).In addition, charts of an organisation are always confidential because it can be used by attackers to access information about who main decision makers are and also who their direct reports are. At the end, they can then apply that data to launch social engineering attacks as well as defrauding a company by accessing the organisation’s systems (Gorge, 2008). A number of organizations and researchers throughout the globe have been trying to investigate why information technology and system might fail and affect organization in one way or the other including loss of capital. It has been identified that political pressures, complexity underestimated to be critical in bringing the failure (Liebowtiz, 1999).In most organizations, Information Technology has grown, and it is the largest centre cost. Key Information Technology projects and functions are currently outsourced globally. For instance, offshore outsourcing by firms in the US is mostly controversial, any of Information Technology outsourcing carries with it risks and concerns that can affect the capital of an organization. In addition, within the United States, challenges have developed between clients and vendors that have been most likened to a failed marriage. References Douglas, D., & Browne, A., 2011. Surviving the Downturn: the Role of Social Capital in the Financial Crisis. Western Journal of Black Studies, 35 (2), 128-132. Dutta, K., & Babbel, D., 2012. Scenario Analysis in the Measurement of Operational Risk Capital: a Change of Measure Approach. Gorge, M., 2008. Data Protection: Why Organisation Still Missing the Point. Journal of Computer Fraud and Technology, 6, pp.5-8. Jackwerth, J.C. &Rubinstein, M., 1996. “Recovering Probability Distributions from Option Prices.” Journal of Finance, 51(5). Kannan, K, Jackie R., & Sanjay S., 2007. “Market Reaction to Information Security Breach Announcements: An Empirical Analysis.” International Journal of Electronic Commerce,12(1), 69-91. Karam, E. & Planchet,F., (2012). Operational Risks in Financial Sectors. Lambrigger, D., Shevchenko P., & Wuthrich M., “The Quantification of Operational Risk using Internal Data, Relevant External Data and Expert Opinions.” Journal of Operational Risk, 2(3), Liebowtiz, J., 1999. Information Systems: Success or Failure?. The Journal of Computer Information System, 40 (1), pp 17-19 MacMinn, Richard D., 2005. “On Corporate Risk Management and Insurance.” Asia-Pacific Journal of Risk and Insurance, 1(1) Mulvey, J. M. &Erkan, H.G., 2003. “Risk Management of a Insurance Company Scenario Generation, Simulation and Optimization.” 2003 Proceedings of Winter Simulation Conference. Phna, C., 2009. Protecting Organization from Personal Data Breaches. Computer Fraud and Technlogy, 1, pp. 13-18. Semenova, M., 2008. Information Sharing in Credit Markets: Incentives for Incorrect Information Reporting, 50, 381-415. Read More