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Second-order derivative: Difference between revisions
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In which the [[JC]] has made up some risk-management jargon, inexpertly cribbing from actual terms used in actual calculus, about which the [[JC]] knows 0. So, apologies in advance, but don’t be upset if I’ve made a balls-up of this. | In which the [[JC]] has made up some risk-management jargon, inexpertly cribbing from actual terms used in actual calculus, about which the [[JC]] knows 0. So, apologies in advance, but don’t be upset if I’ve made a balls-up of this. | ||
So if an event “ƒ” is an event happening out there in TV land — for example, a customer failing to pay — then in risk management terms the [[first-order derivative]] of ƒ is the effect ƒ would have, were it to actually happen in the practical world. E.g., someone in [[credit]] or [[market risk]] going, “Oh, my days! Oh, my lungs and liver! Oh, my hair’s on fire! Oh, [[Legal]] what should I do??!” | |||
This much we all understand. This is part of the ordinary, irrational panic that boils over in any sizeable institution should any of its risk controllers be asked, without sufficient warning, to deal with a situation that appears to present some actual ''risk''. | |||
The [[second-order derivative]] | The [[second-order derivative|''second-''order derivative]] of that function ƒ is more subtle. This is a derivative of the [[first-order derivative]] of that function, and it sits in the hands of the management layer. It manifests only in wing-dings and traffic lights on [[PowerPoint]]s. So, for example, the [[warning light]] on a control panel, the [[RAG status]] indicator on a [[Middle management|management]] [[PowerPoint]], or the numerical ''quantity'' of an item (completed ISDA [[negotiation]]s); reviewed legal [[netting opinion]]s) whose ''quality'' one doesn’t have the [[subject matter expert]]ise to assess. The [[PowerPoint]] that advises management of a warning light on a control panel that says the main reactor has scrammed because there is a fault in the coolant system and the uranium rods are exposed. | ||
It is at the point of this second order derivative that management might sit up and take notice. But their chief concern will be not ensuring that the coolant system is working, or that the rods are no longer melting down, but that the [[RAG status]] on the [[PowerPoint]] reporting the light on the control panel has ''gone back to green''. | |||
[[Operations]] people deal with ''actual'' risks; [[legal eagle]]s and fellow [[Controllers|controller]] [[subject matter expert]]s deal with ''[[first-order derivative]]s'' of those actual risks — what the consequences are if the risk comes about — and [[middle management]] and [[internal audit]] deal with ''[[second-order derivative]]s'', being derivatives of those [[first-order derivative]]s 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. | [[Operations]] people deal with ''actual'' risks; [[legal eagle]]s and fellow [[Controllers|controller]] [[subject matter expert]]s deal with ''[[first-order derivative]]s'' of those actual risks — what the consequences are if the risk comes about — and [[middle management]] and [[internal audit]] deal with ''[[second-order derivative]]s'', being derivatives of those [[first-order derivative]]s 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. | ||