Integrated Risk Management

One of the most important trends in corporate risk management is the rise of integrated approaches to managing risk, such as the increasingly popular enterprise risk management. Centralizing foreign exchange risk management (FXRM) is not enough for integrated risk management (IRM) to happen, however. It is quite possible to have a fully centralized control over FX transactions and FX policy yet still qualify as the opposite of IRM: ‘silo-based’ risk management. This chapter summarizes the three cornerstones of IRM: risk and return are analysed from the perspective of the firm as a whole, not from the units that it consists of. The cornerstones also include exposures to risk factors are identified and assessed on a net basis rather than gross; and correlations between risk factors are utilized to understand overall risk. Firms are recommended to view FXRM as part of a board-supervised process of integrated risk management.