by Martin Winkler, Managing Partner, Schwabe, Ley & Greiner
The cancellation of the – supposedly – guaranteed CHF/EUR minimum exchange rate by the Swiss National Bank (SNB) has once again made clear what risk management means: preparing for unlikely events. The cancellation of the minimum exchange rate was such an event: unlikely, however not impossible to occur.
As we can see from the past, something like this happened before as Figure 1 shows (below).
In risk management, unlikely events should be considered and calculated by way of stress tests. These are indispensible when the question arises of how much risk the company can bear. A stress test focuses on highly adverse movements of past market prices or on movements that have never occurred before. Stress tests should be conducted regularly and the parameters should be scrutinised as well.