Second-order derivative

The Jolly Contrarian’s Glossary The snippy guide to financial services lingo.™ Go Premium Index — Click the ᐅ to expand: Glossary Comments? Questions? Suggestions? Requests? Insults? We’d love to 📧 hear from you. Sign up for our newsletter.

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 whose quality one doesn’t have the subject matter expertise to assess.

Operations people deal with actual risks; legal eagles tend to deal with first-order derivatives of those risks — what the consequences are if the risk comes about — and middle management deals with second-order derivatives of risk: what the RAG status on the opco dashboard should look like if the risk comes about.