You are on page 1of 18

Risk management

2 What is corporate risk management? Corporate risk management relates to the management of unpredictable events that would have adverse consequences for the firm. .18 .

the more valuable the firm.3 Why is corporate risk management important to all firms? All firms face risks. but the lower those risks can be made. Of course.18 . . other things held constant. risk reduction has a cost.

Decide how each relevant risk should be handled. Step 3. Identify the risks faced by the firm.18 .4 What are the three steps of corporate risk management? Step 1. . Measure the potential impact of the identified risks. Step 2.

 Transfer functions that produce risk to third parties..) .18 .. (More.  Purchase derivative contracts to reduce input and financial risks.5 What are some actions that companies can take to minimize or reduce risk exposure?  Transfer risk to an insurance company by paying periodic premiums.

.6  Take actions to reduce the probability of occurrence of adverse events.  Avoid the activities that give rise to risk.18 .  Take actions to reduce the magnitude of the loss associated with adverse events.

7 What is a financial risk exposure?  Financial risk exposure refers to the risk inherent in the financial markets due to price fluctuations.  Example: A firm holds a portfolio of bonds. and the value of the bonds falls.18 . interest rates rise. .

18 . Futures (and other derivatives) can be used either as highly leveraged speculations (More. Swaps. . but at a price determined today.) or to hedge and thus reduce risk.  Futures: Contracts that call for the purchase or sale of a financial (or real) asset at some future date. and futures are used to manage financial risk exposures. options.8 Financial Risk Management Concepts  Derivative: Security whose value stems or is derived from the values of other assets...

.) . Long hedge: involves the purchase of a futures contract to guard against a price increase.9  Hedging: Generally conducted where a price change could negatively affect a firm’s profits.18 . Short hedge: involves the sale of a futures contract to protect against a price decline in commodities or financial securities. (More..

18 . usually because each party prefers the terms of the other’s debt contract. Swaps can reduce each party’s financial risk. .10  Swaps: Involve the exchange of cash payment obligations between two parties.

.11 How can commodity futures markets be used to reduce input price risk? The purchase of a commodity futures contract will allow a firm to make a future purchase of the input at today’s price.18 . even if the market price on the item has risen substantially in the interim.

specified times • A contract to make or take delivery of a product in the future. and month of delivery • Started in agriculture. at a price set in the present • In formalized futures and options trading on exchanges.FUTURE Contract to buy or sell a stated commodity or financial claim at a specified price at some futures. but have expanded to a wide range of products . standardized agreements specify price. quantity.

maka pemilik (pembeli) opsi berhak untuk menggunakannya atau tidak. Pemilik opsi biasanya hanya akan menggunakan haknya dalam kondisi yang menguntungnya. Sementara bagi penjual opsi terikat kewajiban untuk melaksanakan transaksi dalam hal pemilik opsi ingin menggunakan haknya dimaksud. .OPTION • Sebuah hak untuk membeli atau menjual produk turunan di waktu tertentu dengan harga yang telah disepakati dimuka. Karena sifatnya ini adalah hak.

but not the obligation.14 What is an option? An option is a contract that gives its holder the right. to buy (or sell) an asset at some predetermined price within a specified period of time. .18 .

.15 What is the single most important characteristic of an option?  It does not obligate its owner to take any action.18 . It merely gives the owner the right to buy or sell an asset.

 Put option: An option to sell a specified number of shares of a security within some future period. .16 Option Terminology  Call option: An option to buy a specified number of shares of a security within some future period.18 .  Exercise (or strike) price: The price stated in the option contract at which the security can be bought or sold.

18 .17  Option price: The market price of the option contract.Strike price. .  Expiration date: The date the option matures.  Exercise value: The value of a call option if it were exercised today = Current stock price .

18 . .18  Covered option: A call option written against stock held in an investor’s portfolio.  In-the-money call: A call option whose exercise price is less than the current price of the under-lying stock.  Naked (uncovered) option: An option sold without the stock to back it up.