'Quantitative Risk Management (QRM)' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Quantitative Risk Management represents the discipline which deals with the ability of an organization to quantify and manage its risk. This scientific approach to business is becoming increasingly critical in today’s world as organizations need to satisfy stakeholders who demand it.
Government regulators similarly insist on clarity within organizations now, especially regarding the amount of capital financial institutions are holding. The firm executives are hunting for the best allocation of capital. Corporations and their boards are seeking justification to control expenditures. Project managers need to be assured they will make their timelines and meet budgets. All of these individuals and entities are looking for effective QRM nowadays.
These QRM capabilities give decision makers the facilities to both analyze their applicable risk data as well as to forecast the likely positive and negative effects in the future. It provides the organization with enormous advantages. Analyses that are more dependable and finely detailed will deliver information which management requires to make superior decisions that are ultimately better informed. As the Quantitative Risk Management process yields higher quality information and becomes more easily accessible to the relevant organizational members, the decision makers are able to more effectively utilize the techniques of QRM to decrease the amount of guesswork involved in the daily decisions of their business operations.
This allows them to obtain valuable insights into possible risks, so they can estimate their overall exposure to them and discern any weaknesses in their oversight controls. It also permits them to determine how practical new services and products will be and to consider the opportunities for up selling and also cross selling of company goods, information, and services. Finally, organization leaders will be able to evaluate any degrees of variance in their company cash flow so that they can streamline and better their ultimate operations.
Quantitative Risk Management is important as every one of those activities just mentioned contains at least some degree of risk. By quantifying and considering them all using a combination of techniques such as trending, modeling, stress tests, and metric evaluations, company decision makers can create faster and more effective responses. This allows them to benefit from any uncovered opportunities and simultaneously to deal with any possible negative effects before they actually materialize and cause significant damage.
There are numerous examples of the uses of and needs for Quantitative Risk Management in business organizations. Cash flow at risk, or CFaR, represents one of the most significant drivers of business. Company leaders require effective prognoses of their future cash flow in order to firm up important decisions for the business. These include confirming or pushing off investments, reducing expenses, reinvesting capital in the business model, or choosing to reengineer their critical operations. Correctly extrapolating cash flow involves proper understanding of such underlying factors as currency changes, sales, pricing of products and services, vendor viability, and operational costs.
Value at Risk, or VaR, is another critical measurement in an organization that benefits from Quantitative Risk Management. Bigger, international, and more complicated financial institutions such as JP Morgan Chase, Citigroup, HSBC, Standard Chartered Bank, BNP Paribas, and Banco Santander have to constantly evaluate where their risk exposures are in order to appropriately allocate the correct capital amounts to be capable of absorbing losses which they do not anticipate.
Project risk management is another area where this Quantitative Risk Management can save the day. So many projects exceed their allocated budgets, deadlines, and milestone markers simply because there is not a sufficient evaluation of the variables, uncertainty, and risk involved with the project itself. This is where the process of QRM can save enormous amounts of time, frustration, and ultimately resources by delivering on deadlines and budgets.