JP MORGAN PRIVATE BANK Case Solution
Therefore, it is recommended for the company to change his role from an advisor to overall risk manager of portfolios. He would then not only engaged in advisory services but also through proper analysis of market conditions including the prices, volatility, liquidity, trends, and credit cycles. In addition, he can measure risk exposure through VAR, Stress Tests, P&L Sensitivity, Limit Usage, and the key risk drivers come up with the optimal and revenue generating portfolio with committed results.
MORGAN RISK MANAGEMENT TOOLÂ (KANCHU* & KUMAR**, 2013)
The companies do take risks in order to maximize their returns. With the help of rigorous approach, management of the company should manage the risk effectively in order to see no surprise in their future earnings. The process can be done by someone who can effectively identify various types of risks, which the company is exposed to. These risks cannot be gathered by daily or weekly reports alone.
Therefore, the company should adopt various different reports to monitor risks, which includes the changing risk profile, sensitivity reports, VAR, risk relating to profit and loss statements, market conditions, and the complete analysis of key risk drivers. These can be analyzed using the daily, weekly, quarterly, as well as annual reports of the company. In addition to the company specific risk, the risk relating to the changing market conditions must also be analyzed which constitutes more significant risk.
JP Morganâ€™s risk management provides eleven different factors and by using these factors, the individual investors can easily manage their risk and return in portfolio. The tool consider cultural impact, analysis of mark to market, business risk, operational risk, common sense; and most importantly analyze the firmâ€™s risk appetite.
The eleven different factors that are proposed by Morgan Risk Management tools are:
- S&P500 INDEX
- RUSSELL 2000 INDEX
- MSCI EAFE INDEX
- MSCI EMERGING MARKETS INDEX
- CBOE VOLATILITY INDEX â€“ VIX
- 10 YEARS U.S. TREASURY RATES
- HIGH YIELD CORPORATE CREDIT SPREADS
- TRADE â€“ WEIGHTED USD INDEX
- S&P GSCI TOTAL RETURN INDEX
- 1- MONTH LIBOR
- S. CPI URBAN CONSUMERS MOM% CHANGE INDEX
AIG FINANCIAL PRODUCTS
The significant issue that arises in this financial crisis is related to default risk of non-repayment of individual investors due to the fall in housing prices because of prevailing economic conditions that severely impacted the world economy. Due to these issues, JP Morgan in order to manage risk of AIG Financial Products proposed the company to engage in writing insurance on the different collateralized debt obligations that the company provides for lending its financial products.
In this way, the lenders could be protected from default risk of payment from borrowers. Under this method, the customers are charged with additional premium to AIG in order to ensue bonds that they held in their portfolio. The insurance products that the company wrote are credit default swaps with which the managing of risk is done. However, from the recent stats it can be seen that the risk management model proposed by JP Morgan did not work under extreme market conditions to protect AIGâ€™s financial products from the risks.
The derivative financial product, Credit Default Swaps is increasing complexity in use, which creates problems for managing risk efficiently. Moreover, the company is required to prudently manage risk with discipline………………….
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