Second-order derivative

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In which the JC has made up some swap talk, inexpertly cribbing from actual terms used in actual calculus, about which the JC knows 0.

In risk management, the first-order derivative of an event “ƒ” is the effect that event would have, were it to actually happen in the practical world. So, for example,

The second-order derivative, of function ƒ is a derivative of the first-order derivative of that function. So, for example, the warning light on a control panel, the RAG status indicator on a management PowerPoint, or the numerical quantity of an item (completed ISDA negotiations); reviewed legal netting opinions) whose quality one doesn’t have the subject matter expertise to assess.

Operations people deal with actual risks; legal eagles and fellow controller subject matter experts deal with first-order derivatives of those actual risks — what the consequences are if the risk comes about — and middle management and internal audit deal with second-order derivatives, being derivatives of those first-order derivatives of the underlying risk: what the RAG status on the opco dashboard should look like if a NAV trigger is hit; whether the template confidentiality agreement as been reviewed within the six-month time limit arbitrarily prescribed by some policy for the review of standard form legal agreements — that kind of thing.