ING Group 2

Submitted to:
Prof. David Veredas
Submitted by GROUP 2
Puneet Patwari 220601033

Siddhant Sharda 220601045
Ayushi Srivastava 220601009
Shivendra Singh 220601043
Rishabh Chhikara 220601037
Reflection Paper
We got the opportunity to learn Financial Risk Management (FRM) from esteemed Professor
David Veredas, who provided us with great insights into risk and how to manage it. One unique
thing that we observed in this course is that we got to learn a lot about foreign markets and
how things work there, which we think would be extremely helpful to us.
On our first day, we learned what risk is and what are the features of risk. How risk can be both
an opportunity as well as a threat. Before we thought the risk was an evil thing to have, but
after the classes, we realized how important the risk is to have a positive return. Then we
learned about the impacts associated with risks (both positive and negative), and the professor
made us think about whether it can be monetized. Later, we learned how to measure risk. We
learned different measures of measuring risk like standard deviation, Mean absolute deviation.
At last, an assignment was provided to cultivate our thinking and analysis prospects where we
explored the annual report of ING bank to find out the risks it faced, what kind of impacts it had
on ING bank, and whether it was able to monetize them. This assignment gave us hands-on
experience in applying the knowledge that we learned in class.
On the second day, we critically analyzed the standard deviation equation and found out the
problems it has. We also learned about the industrial approach which is Risk Metrics that was
developed by JP Morgan. Another approach is the academic model approach which is the
GARCH model. We then looked at volatility. Volatility can be viewed as the expected risk or risk
in normal times, while the tail risk is the unexpected risk or risk in abnormal times.
Risk = the probability of an event over a period X Value of portfolio
Value at risk: Loss that is unlikely to be exceeded over a period
While doing the assignment I noticed that the companies also use the same method, we
studied to estimate and monetize risks i.e., VaR. we learned that this technique is majorly used
while estimating market risk by the banks and with a confidence level of 99% for the span of 10
days.
On the third day, we learned about why companies care about risk management. Companies
use different hedging techniques to manage their risks, mainly futures and swaps, and
sometimes options also. They do these hedging activities so that they can focus on their core
operations rather than trying to beat the market sentiments and speculate. Through these
activities, they can stabilize their cash flows and reduce the amount of volatility, protect the
company from any unforeseen events, and ensure that the company remains confident in its
capital budgeting. We also saw how hedging helps in maintaining the balancing act of the
company that is profitability, stability, and growth. We also learned and discussed about we
need to pick the risks (having high impact) that we want to manage very strategically as
managing too much risks puts pressure on the company’s earnings. Then we focused on carbon
emissions, how they are traded in the ETS (Energy Trading System) and how it helped
government in curbing CO2 emission. Then, we learned the different tools used to manage risk
like swap, forward and future. Later in the assignment we researched how companies are
hedging their risks and which tools they use to hedge their risks. We got to know that they use
swaps a lot as it is for the long term and avoid options as they are costly.
On the fourth day, we covered the types of volatility and the Black & Scholes option pricing
equation, which excluded tail risks because it was based on Gaussianity. After talking about the
implied volatility function and VIX, which is like a subset of implied volatility with 1-month
options. we did a fun exercise to improve our understanding of VIX by imagining how we would
explain it to our elders. This exercise helped us gain better insights into the VIX. Following that,
we learned how to measure risk in the fixed-income portfolio. we completed an exercise to
help us better comprehend the fundamentals of interest, duration, and convexity and how they
affected the bond's NPV. The next activity was determining the relationship between Dmod and
interest, duration, and convexity. During this activity, we learned how to find the relationship
between the duration, maturity, and rate intuitively with the help of the fulcrum. Later while
doing the assignment, we researched these topics more to get a better understanding of these
topics and applied them to answer the questions.
On the final day, we learned about why it is necessary to incorporate tail risk and how we can
incorporate it into the model. Later we discussed the importance of climate risk, how it impacts
the business, and why it is becoming necessary to manage.
Connecting the dots:
At last, I think the sessions and assignments were well-planned and connected to each other.
Teaching us step-wise: what a risk is, different types of risk the company faces, how to measure
risk, how companies measure risks, and finally how to mitigate risk, and how companies
mitigate their risks. (Some were taught to us and some we learned while doing the assignment)
Suggestions through which companies can improve their reporting of financial and climate
risks and their management:
Forward-Looking approach: Instead of focusing on a backward-looking measure, the
organization can analyze its risk appetite using forward-looking measures.
Impact of Tail Risk: Many businesses only take volatility into account when evaluating risk
and tail risks are frequently overlooked. These can be considered using the student T
distribution. It is important because ignoring tail risks can expose a business to a significant loss
for which they might not have been prepared.
Monthly sustainability reports: Instead of releasing annual sustainability statistics, a monthly
report on the company's sustainability development could be made available to investors. This
would allow the business to publicize its accomplishments more effectively and pique its
interest.
Incorporate climate risk in Valuation: Current and upcoming projects should incorporate the
climate risk while valuing their projects, which can be done by increasing the discount rate of
the project. We can also use scenario analysis. The process of scenario analysis can involve
forecasting various future events, such as temperature increases or abrupt climatic changes,
and assessing their potential effects on the financial performance of the organization.

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Submitted to:

Prof. David Veredas

Puneet Patwari 220601033

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