Financial risk management Essay Example | Topics and Well Written Essays - 250 words

Financial risk management - Essay Exampleman Sachs desire saw its profits dec striving due significant losses being realized from large subprime write downs which were followed by mortgage crisis meaning beneficiaries were unable to pay. The piteous selling of subprime mortgage securities to Lehman Brothers is blamed to have decline the financial crisis to the detriment of both institutions. As a result, the bank approached the federal government for a bailout under the troubled asset relief programme (TARP). Since the loan came with high interest rates and short repayment period, the banks financial condition worsened and become highly geared. In summary, Goldman Sachs financial crisis can be classified as threefold, that is, financial malpractices among traders and top executives in occupation mortgage securities (operational risk), mortgage fabrication crisis/ risks and high financial leverage.Risk management theories that can be used to explain the crisis an offer insights into possible solutions are discussed hereunder. Weinberg (2007) noted that the bank relied on incomes from trading to maintain its profit growth which was risky. Therefore, the bank should have maintained a prudent model to monitor the value at risk (var) for securities being traded. VaR model shows the maximum estimated loss for a portfolio factoring market related risks at a given time horizon (Esch, Kieffer and Lopez, 2005). Capital Asset determine Model (CAPM) would also have helped the bank to understand the behavior of capital markets and possibilities of excess, negative and optimal return on a portfolio by analyzing the securities market line (Elton et al., 2010). Brownian motion model of financial risk management though highlights useful risk strategies useful under normal circumstances was found to fail in providing rational understanding of financial turmoil (Borma and Sharma, 2011).Boma, S. & Sharma, D. (2011). How much trust should risk managers place on Brownian Mot ions of financial markets? International Journal