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D. M. Chance An Introduction to Derivatives and Risk Management, 6th ed. Chapter 13: Managing Risk in an Organization Paris-based Natexis Banques Populaires has announced that it has made “significant losses” in its equity derivatives trading business due to poor risk control and failures in its valuation models. Risk, January 2003, p. 8 Important Concepts in Chapter 16 The differences between the practice of risk management by end users and by dealers Principles of effective risk management in an organization Accounting for derivatives How some organizations lost money using derivatives Responsibilities of senior management The Structure of the Risk Management Industry End Users Firms that engage in derivatives transactions to manage their risk. Mostly non-financial corporations, but also pension funds, mutual funds, U.S. state and local governments, foreign governments, endowments, and other private organizations. In corporations the treasury department is usually responsible for derivatives transactions. The Structure of the Risk Management Industry (continued) Dealers Financial institutions that make a market in derivatives. They stand willing to take either side of a derivatives transaction. They typically hedge their risk and earn a profit off of the difference between their buying and selling prices. The Structure of the Risk Management Industry (continued) Other Participants in the Risk Management Industry consultants, including accounting, management consulting, and personnel search software firms law firms Organizing the Risk Management Function in a Company Good risk management requires a sound organization structure that begins with responsibility at the top. Dealers usually have an independent risk manager who reports to the CEO, has access to relevant information, and authority to block or initiate certain transactions. Corporate risk management should also be centralized but is often decentralized. Many corporations run the treasury as a pro