The Risk of Trading: Mastering the Most Important Element in Financial Speculation

CHAPTER 1

Foundations of Risk Management

The golden age of corporate and accounting scandals during the Enron era placed risk management on the lips of the average corporate employee. In an attempt to mitigate future scandals, the U.S. government passed the Sarbanes-Oxley Act in 2002. The U.S. Senate called it “The Public Company Accounting Reform Act,” and the House called it the “Corporate and Auditing Accountability and Responsibility Act.” I'll refer to it by its simple hybrid name, SOX. This legislation is at the heart of risk management today, so it's vital to begin any discussion with a little history. The goal of Chapter 1 is to provide an introduction to risk principles, which you will use in your day-to-day trading activities.