Quantifying Op Risk -- Valuing Operational Risks Using Utility Functions

Putting a value on an operational risk is a big challenge. But managers must also decide whether it is cost effective to mitigate the risk. Dave Syer, Rainer Ender and Ansgar West use the risk of settlement failure in investment banking to show how a utility function can help managers solve both problems.1

Let’s begin by imagining the dilemma of a manager in an investment banking business. The manager is concerned about an open bond trade that is due to be settled by his bank in three days’ time

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