Risk free rate of return

1. Organisations.

Risk management for organisations includes:

• Understanding what business and financial risks the organisation is exposed to, and then
• Considering whether the financial returns - or other benefits - generated are sufficient to justify taking those risks.

The risks need to be evaluated and assessed so that decisions can be made on whether to retain them, and if so whether to employ techniques to mitigate or transfer risks.

The underlying risks can be managed to limit risk. They can be hedged with counterbalancing exposures often created through the financial markets, or insurance taken out to protect the organisation's financial health.

Risk management for organisations includes the management of:

1. Business and operational risk
2. Commodity risk
3. Credit risk
4. Exotic risk
5. FX risk
6. Interest rate risk
7. Pensions risk

One way of working with risk management is through a framework comprising:

- Identification

- Assessment

- Evaluation

- Response and

- Reporting

2. Wider economic risks.

Similar activity relating to the wider economy.

For example, the Bank of England's responsibilities in relation to the UK economy.

The economic impacts of Covid-19 to date: risk management

"At the start of this year, before the Covid-19 outbreak had any economic significance for the UK, I argued that risk management considerations called for a relatively prompt response to downside risks... the economy had some slack and seemed likely to remain sluggish, and risk management considerations implied that monetary policy should respond promptly to such downside risks.

This is because, with a low neutral rate and limited monetary policy space, the MPC’s ability to return inflation to the 2% target is asymmetric.

If the economy were to overheat and lift inflation above target, the MPC would have ample scope to tighten policy to push inflation back down to target.

But if the economy were to be stuck with sluggish growth and below target inflation, the MPC would have more limited scope for stimulus to lift inflation back to target.

In such conditions, risk management implies that policy should react in an asymmetric fashion – if tightening is needed, it should be gradual; if easing is needed, it should occur promptly.

And when the economy is soft, as it was early this year, it is better to err on the side of somewhat too much stimulus rather than too little.

I think these risk management arguments apply even more strongly now.

This is in part because the prospects for the economy are tilted more on the side of a slower recovery, in my view, stemming from high uncertainty, elevated risk premia and reduced risk appetite."

Michael Saunders, External Member of the Bank of England's Monetary Policy Committee (MPC), May 2020.

See also

• Asset-liability management
• Black swan
• Corporate treasury
• Downside risk
• Easing
• Enterprise risk management
• Financial model
• Foreign exchange risk
• Forward contract
• Guide to risk management
• Hedging
• Inflation target
• Insurance
• Key risk indicator (KRI)
• Materiality
• Metric
• Monetary Policy Committee
• Monetary policy space
• Neutral rate
• Non-transferable risk
• Reputational risk
• Resilience
• Risk
• Risk analysis
• Risk appetite
• Risk assessment
• Risk averse
• Risk evaluation
• Risk identification
• Risk Management Association
• Risk management framework
• Risk management policy
• Risk premium
• Risk register
• Risk reporting
• Risk response
• Soft
• Sustainability
• Tightening
• Transferable risk
• Treasury
• Treasury Risk Management Committee

Other links

Risk management - Technical resources

Treasurers need to take a structured approach to managing risk