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Original Title: 1.3_Risk+Taking+A+Corporate+Governance+Perspective+风险承担%3A公司治理的角度+%282015考纲本节删除，选修%29

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You are on page 1of 25

1-25

Classifications of Risks

Risk

Business Risks

Financial Risks

Market Risk

()

Absolute risk

Relative risk

Directional risks

Non-directional risks

Basis risk

Volatility risk

Measured by VAR

Credit Risk

()

Operational Risk

()

Probability of Default

Credit Exposure

Loss Given Default

Model risk

People risk

Legal risk

Liquidity Risk

()

Funding liquidity risk

2-25

Market Risk

Market risk is the risk that declining prices or volatility of prices in the

financial markets will result in a loss.

Types

Absolute Risk

Relative risk

Directional risks

Non-Directional

risks

Basis risk

Volatility risk

3-25

Definition

Measured in terms of shortfall relative to the initial value of the

investment and focuses on the volatility of total returns.

Measured in terms of shortfall relative to a benchmark (e.g.

market index).

Involve exposures to the direction of movements in major

financial Market variables. These directional exposures are

measured by first order or linear approximations.

Are risks that have non-linear exposures or neutral exposures to

changes in economic or financial variables

The risk that the price of a hedging instrument and the price of

the asset being hedged are nor perfectly correlated.

Risk of loss from changes in actual or implied volatility of

market prices.

FRMFinancial Risk Manager

Credit Risk

Credit risk is the risk of an economic loss from the failure of a counterparty to

fulfill its contractual obligations.

Probability of Default

4-25

Credit Exposure

=1-Recovery Rate

Operational Risk

Operational risk is the risk of loss due to inadequate monitoring systems,

management failure, defective controls, fraud, and /or human errors.

Types

Definition

Model Risk The risk of loss due to the use of misspecified or misapplied models. For

example, an institution buying or selling collateralized mortgage

obligations (CMOs) may be exposed to model risk if the model used to

price the CMOs does not adequately account for the probability of

default in the underlying mortgages.

People Risk The risk associated with fraud perpetrated by internal employees and / or

external individuals. An example of people risk is a rogue trader.

Legal Risk

5-25

The risk of a loss in value due to legal issues including lawsuits, fines,

penalties, and /or damages.

Liquidity Risk

The term liquidity has been defined in myriad ways that ultimately boil

down to two properties, asset liquidity risk, a property of assets or

markets, and funding liquidity, which is more closely related to creditworthiness.

Asset liquidity risk (also called market liquidity risk) results from a

large position size forcing transactions to influence the price of

securities.

Funding liquidity risk (also called cash-flow risk) refers to the risk

that a financial institution will be unable to raise the cash necessary to

roll over its debt; to fulfill the cash, margin, or collateral requirements

of counterparties; or to meet capital withdrawals.

6-25

Risk Profile

Risk profile: the list, with all of the risks that a firm is potentially

exposed to and categorizing these risks into groups, is called a risk

profile.

Risks that are un-hedged.

Risks that exploited.

reviewed by the Board of Directors.

experiences is a starting point creating a companys risk profile.

7-25

Risk Governance

is permitted, optimized, and monitored within an organization.

authority, and communication/reporting mechanisms.

boards use risk committees to help fulfill responsibilities.

organization from the perspective of shareholders and/or stakeholders.

8-25

Example

is correct?

A.

oversight.

B.

principles.

C.

and authority.

D.

by the organization.

9-25

Answer D

10-25

N

CFt

NPV

t

(1

r)

t 0

where:

CFt: the expected net cash flow at time t

N: the estimated life of the investment

r: the discount rate (cost of capital)

11-25

capital (WACC) based on a combination of the cost of equity and the cost

of debt.

WACC

cos t of capital = cost of equtiy

equity

debt

cos t of debt

debt equity

debt equity

Where:

cost of equity = risk-free rate + beta equity market premium

cost of debt = cost of borrowing(1- marginal tax rate)

cost of borrowing = risk-free rate + default spread

12-25

Example

Use the following information to answer the following Questions:

Reid, Inc. is embarking on a new 4-year project in a foreign country with a

country risk premium of 4%. Expected incremental annual cash flows from this

project (assuming all cash flows occur at the end of the year) are as follows:

Year

Cash Flow

0

-$2.0 million

1

-$1.75 million

2

-$0.5 million

3

+$0.4 million

4

+$2.6 million

The terminal value of the project in year 4 is $2 million. Reids relevant risk-free

rate is 3%, and the beta of the new project is 1.1. The market risk premium is 5%.

Reids credit rating lends itself to a 3.5% default spread, and its marginal

corporate tax rate is 32%. The firms capital structure consists of a 45% debt and

55% equity funding mix.

13-25

Example

rate (i.e., its cost of capital)?

A. 7.43%

B. 8.86%

C. 9.08%

D. 10.0%

Answer: C

The cost of equity is computed as: 0.03 + 1.1(0.05 + 0.04) = 12.99%

The cost of debt is computed as: (0.03 + 0.035)(1 0.32) = 4.42%

The cost of capital is computed as: (12.9%0.55) + (4.42%0.45) = 9.08%

14-25

Example

value of the new project (i.e., the net present value)?

A. -$561,700

B. -$467,100

C. +$120,200

D. +$177,300

Answer: B

The risk-adjusted value of the project using the 9.08% discount rate is:

1.75

0.5

0.4

2.6

2.0

NPV 2

2

3

4

1.0908 1.0908 1.0908 1.0908 1.09084

0.4671 million = - $467,100

15-25

E ( Ri ) R f i E ( RM ) R f =2.25%+1.67 4.70%=10.1%

V

16-25

800, 000

2

3

(1 10.1%) (1 10.1%) (1 10.1%)

FRMFinancial Risk Manager

About Beta

costs (interest expenses) that make their equity earnings more

volatile and their equity betas higher. The beta for equity in a

firm can be written as a function of the beta of the business

that the firm operates in and the debt to equity ratio for the

firm:

Debt

Levered(Equity) Beta = Unlevered Beta 1 1 tax rate

Equity

17-25

Levered Beta = Unlevered Beta(1 + (1 15%)200million/100million)=2.7

2.50 3.25

18-25

holistic approach to managing risk, shifting away from an approach of

ERM also views risk management as a value-creating activity, and not

Regardless of the framework used, it is important that risk decisions

to its shareholders.

19-25

Step1: identification of risk management and enterprise objectives

risk

identification

risk

analysis

Step2: risk

assessment

AIRMIC

risk

manageme

nt process

risk estimation

purely

qualitative

semiquantitative

purely

quantitative

risk evaluation

scenario analysis

decision tree

simulation

Value at Risk (VaR)

risk avoidance

Step3: risk

treatment

risk transfer

risk reduction

risk retention

20-25

sensitivity analysis

Risk Estimation

1.

Purely Qualitative

21-25

Risk Estimation

2.

22-25

Semi-Quantitative

The semi-quantitative estimate method

transforms a series of qualitative

judgments into quantitative variables,

using numerical scoring systems to arrive

at a risk score a numerical synthetic

risk judgment.

For example The risk severity is

determined by multiplying the probability

score by the impact score.

An event that is probable and would have

severe impact on the corporation will

score 50 x 200 = 1000; so this risk score

is high.

Example

currently in the process of diversifying the firms investment

portfolio by varying the correlations and asset classes among

securities. Diversification is best characterized as which of the

following risk treatments?

A.

Risk avoidance.

B.

Risk transfer.

C.

Risk retention.

D.

Risk reduction.

23-25

24-25

FRM

25-25

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