Financial Risk Management Flashcards
Financial Risk Management
1
Q
Definition of Risk
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2
Q
Risk Management
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- Risk Management are all coordinated activities to direct and control an organization with regard to risk
- Objectives
- Increasing the range of opportunities
- Identifying and managing risk entity-wide
- Increasing positive outcomes and advantage while reducing negative surprises
- Reducing performance variability
- Improving resource deployment
- Enhancing enterprise resilience
• Risk Management Standards
- COSO II (2004) – Enterprise Risk Management—Integrated Framework
- COSO II (2017) – Enterprise Risk Management—Integrating with Strategy and Performance
- ISO Standard 31000 (2009)
3
Q
Risk Management Process
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4
Q
Financial Risk Management as Part of Enterprise Risk Management
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5
Q
Governance and Culture
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6
Q
Strategy and Objective-Setting-main content
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7
Q
Establishing the Business Context
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8
Q
Risk Appetite
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9
Q
Corporate Objectives- Manifold Expectations
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10
Q
- Formulating Financial Objectives-From the balance sheet …
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11
Q
- Formulating Financial Objectives
… to balance sheet related Key Performance Indicators (KPI)
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12
Q
- Formulating Financial ObjectivesFrom the Statement of Income to related KPIs
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13
Q
- Formulating Financial Objectives-From Cash Flows to related KPIs
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14
Q
Specific Financial Objectives-Optimizing Liquidity 1
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15
Q
Specific Financial Objectives-Optimizing Profitability 2
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16
Q
Specific Financial Objectives-Optimizing Net Present Value 3
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17
Q
* Specific Financial Objectives-Optimizing Leverage 4
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18
Q
1.3 Assecing risk-Performance is Linked to Risk Assessment
- Identifies Risk—The organization identifies risk that impacts the performance of strategy and business objectives.
- Assesses Severity of Risk—The organization assesses the severity of risk.
- Prioritizes Risks—The organization prioritizes risks as a basis for selecting responses to risks.
- Implements Risk Responses—The organization identifies and selects risk responses.
- Develops Portfolio View—The organization develops and evaluates a portfolio view of risk.
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19
Q
1.4 Responding to Risk -Modifying Risks
A
There are different approaches to respond to risk
- Avoiding-ending the activities and process that created the risk
- Reducing-impacting the likelihood and/or the impact (consequences) through mitigation
- Transferring-reducing risk likelihood or impact by transferring or otherwise sharing a portion of the risk (insurance, hedging, outsourcing)
- Accepting-retaining the risk by informed decision, no action is taken to affect risk likelihood or impact
- can involve also avoiding the risk by deciding not to start or continue with the activity that gives rise to the risk
- can involve taking or increasing risk in order to pursue an opportunity;
- that deal with negative consequences are sometimes referred to as “risk mitigation”, “risk
- elimination”, “risk prevention” and “risk reduction”.
- can create new risks or modify existing risks within another sub-category
- nearly always comes at (opportunity) costs
- has to be evaluated within a portfolio context.
20
Q
Techniques for Modifying Credit Risks
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21
Q
Techniques for Modifying Market Risks
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22
Q
Risk management techniques are producing side effects
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23
Q
1.5 Monitoring and Communication
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Monitoring
- Continual checking, supervising, critically observing or determining the status in order to identify change from the performance level required or expected
- Monitoring can be applied to a risk management framework, risk management process, risk or control
Review
- Activity undertaken to determine the suitability, adequacy and effectiveness of the subject matter to achieve established objectives
- Review can be applied to a risk management framework, risk management process, risk or control.
Communication
- Continual and iterative processes that an organization conducts to provide, share or obtain information and to engage in dialogue with stakeholders regarding the management of risk
- The information can relate to the existence, nature, form, likelihood, significance, evaluation, acceptability and treatment of the management of risk
- Example:
Annual Report – Risk & Opportunity Report
Annual Report – Notes on Financial Risk Management / Financial Statement
24
Q
Important Rules and Regulations for Disclosure
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25
2.1 Credit Risk
A company takes credit risks against many counterparties
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2.2 Quantifying Credit Risk
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2.3 Some Credit Risk Modifying Techniques
**Risk with Bank Deposits**
* During the financial crisis (2008) many companies realized that their deposits (cash accounts) at banks were in danger
* Due to the bankruptcy of the investment bank „Lehman Brothers“ and the spill over to the global banking system - even unthinkable to then – many banks globally went bankrupt as well.
* This led to substantial defaults on cash accounts and receivables from financial instruments against these banks.
* In the following treasurers put more attention on
* Deposit Guarantee Schemes
* and diversifying their cash accounts with different banks
**Risk with Accounts Receivables**
* Accounts receivable refers to the outstanding invoices a company has or the money the company is owed from its customers e.g. due to the delivery of products or services.
* Receivables essentially represent a line of credit provided by the company
* Normally accounts receivables are due within a relatively short time period, ranging from a few days to a year.
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2.3.1 Deposit Guarantee Schemes
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Deposit Guarantee Schemes
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2.3.2 Factoring- Participants
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2.3.2 Factoring- Some Statistics (2016)
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2.3.2 Factoring-Functions and Types
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Example：2.3.2 Factoring- Factoring Costs
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2.3.2 Factoring- Factoring as a Risk Management Tool
• By factoring the accounts receivables, the factoring client is able
* to obtain cash (increase liquidity)
* to improve its balance sheet ratios (reduce funding needs)
* to reduce its credit exposure
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2.3.2 Factoring- Forfaiting
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Comparing Forfaiting to Factoring
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2.3.3 Securitisation- Economics of Securitisation
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Securitisation via Special Purpose Vehicle (SPV)/ Special Purpose Company (SPC)
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Securitisation as a Technique to Reduce Credit Risks and Improve Liquidity
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Asset Backed Securities (ABS)
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Financial Risk Management- Liquidity Risk Management
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Liquidity Risk Management
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Liquidity and Cash
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3.1 Cash Management
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3.1 Cash Management 2
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3.2 Techniques and Instruments
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3.2 Techniques and Instruments 2
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3.2 Techniques and Instruments 3
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3.3 Economics of Netting and Clearing
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3.4 Application of Interest Rate Swaps
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3.4 Application of Interest Rate Swaps 2
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4.1 Foreign Exchange Markets
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4.1 Foreign Exchange Markets 2
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4.2 FX Rates and FX Contracts
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4.2 FX Rates and FX Contracts 2
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4.2 FX Rates and FX Contracts 3
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4.2 FX Rates and FX Contracts
Pricing Outright Forward Contracts
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4.3 Hedging FX Risk
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4.3 Hedging FX Risk 2
4.3 Hedging FX Risk
Risk Management with Linear Instruments
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4.3 Hedging FX Risk
Risk Management with Asymmetric Instruments (Options)
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4.3 Hedging FX Risk
Implementing a Hedging Strategy
4.3 Hedging FX Risk
Setting the Objectives
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5.1 Definition and Interpretation
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5.2 Estimation of VaR
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5.2.1 Variance-Covariance Method
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5.2.1 Variance-Covariance Method
Two Assets Case
5.2.1 Variance-Covariance Method
N-Assets Case
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5.2.1 Variance-Covariance Method
VaR Estimation for Fixed Income Bonds
5.2.1 Variance-Covariance Method
VaR Estimation for Options
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5.2.2 Historical Simulation
Simulate Returns Using Recent History or Stress Scenarios (Non-parametric)
5.2.3 Monte-Carlo Simulation
Simulate Returns Using Monte Carlo Methods
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5.3 Caveats and Alternative Measures
Value at Risk Caveats
5.3 Caveats and Alternative Measures
Alternative Downside Risk Measures
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Funding Risk Management
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6.1 Managing Own Credit Rating
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6.2 Managing Funding in Foreign Currencies
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6.3 Managing Pensions Liabilities
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Summary Financial Risk Management
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Exercise 1
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Exercise 2： Forward rate， currency discount
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Exercise 3
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Exercise 4
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Exercise 5
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Exercise 6
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Exercise 7
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Exercise 8
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Exercise 9
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Exercise 10
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Exercise 11& 12
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Exercise 13
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Exercise 14
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Exercise 15
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Exercise 16
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Exercise 17
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Exercise 18
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Exercise 19
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Exercise 20
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Exercise 21
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Exercise 22: delta gamma
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Exercise 23
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Exercise 24
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Exercise 25:
1. State different techniques for the modification/reduction of credit risks?
2. Which are the parameters to calculate the credit risk?
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Exercise 26:
a)
* Which are the major financial objectives?
* Specity the liquidity ratios!
* Which are the major profitability ratios?
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Exercise 26 b)
What are the prime objectives for the cash management department?
Explain the tasks for cash management?
Which instruments are applied?
Explain the instruments in detail!
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Exercise 27:
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Exercise 28
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Exercise 29: WACC
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Exercise 30: Explain in detail the major types of foreign exchange risks!
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Exercise 31: Arbitrage
