Risk Management Homework

Q1. (5 points) What is your own understanding of the relationship between risk management and financial engineering? Q2. (5 points) A common practice in financial firms, e.g., commercial banks, is to create loan loss provision (LLP). LLP represents a bank's estimate of future loan losses. Suppose that a bank extends a $500,000, five-year loan to a gas station in its community. If one year later the borrower runs into financial problems, the bank will create a loan loss provision. Discuss the following issues:  Can the loan loss provisioning practice be considered as a risk management mechanism? Why and why not?  Bank managers generally use LLP to smooth the reported earnings. Does earnings smoothing via LLP affect the risk perceived by outside investors? How (i.e., increase risk or decease risk) and wh