RISK MANAGEMENT

The Future Cannot Be Predicted No one has ever been successful in predicting the stock market, interest rates, or exchange rates consistently. Yet, financial risk that arises from uncertainty can be managed. Risk Management and Risk Taking are not opposites but rather two sides of the same coin.

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The Risk Management Process Identify Risk Exposure Measure and Estimate Risk Exposures Find Instruments and Facilities to Shift or Trade Risk Assess Costs and Benefits of Instruments

Assess Effects of Of Exposures

Form a Risk Mitigation Strategy * Avoid * Transfer * Mitigate * Keep Evaluate Performance

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Risk

Management is now widely acknowledged as the most creative force in the worlds financial markets.
Risk

Management is how firms select the level of risk that is appropriate for their company.
The

development of Risk Management is growing rapidly and is experiencing growing pains.

Long Term Capital Management

Enron
Global Crossing Qwest Credit Derivatives

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The Conflict: Risk and Return Higher Return = Higher Risk

Higher Risk = Higher Return How High is Too High?

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Risk the risk of loss following a change in the factors of the credit quality of an asset (credit rating changes, default, changes in recovery costs).
Credit

Risk the risk of losses from changes in market risk factors (interest rates, foreign exchange rates, equity and commodity price changes).
Market

Risk financial loss resulting from a host of problems (fraud, technical problems, failure in controls, personnel, political problems).
Operational

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Enterprise Risk Management (ERM)

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Risk Manager
-The

role is to identify sources of risk and make them visible to key decision makers and stakeholders in terms of probability
-But

the risk managers job is rarely easy (who likes bad news).

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Four Basic Strategies:
1. 2. 3. 4.

Avoid Transfer Mitigate Accept

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