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ERM [10]

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Bullet points include: Risk benefits or harms different stakeholders differently Traders may benefit more from upside risk than they suffer from downside risk Equity-holders often have limited liability and debt holders and/or regulators/governments/industry wide protection arrangements may lose if firm suffers large losses Often focus is on principals trying to control agents (‘agency problems’) Non-academic way of describing these issues is corporate governance, e.g. Cadbury report: “corporate governance is the system by which businesses are directed and controlled” Financial firms typically consist of hierarchies of such delegations, from shareholders to managers to dealers etc. whose interests may be misaligned ERM disciplines are an essential part of mitigating agency risk

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