RISK Management

Question 1

Risk Control

Answer 1

• W’keitsverteilung Kontrollieren
  
  • Risikovermeidung
  • Schadensverhüttung
  • Schadensreduktion Maßnahme

Question 2

Risk Financing

Answer 2

• Maßnhame aus dem Finanzsektor, nach dem ein Schaden eingetreten ist die Finazielle Lücke zu schließen
  
  • Klassische Versicherung
  • Hedging
• Risk transfer decisions

Question 3

Irrelevance of risk transfers (MM)

Answer 3

Risk transfer = financial decision = ZERO NPV

• Risk reduction per se is not a reasonable aim if investors are well diversified and can take risk-reduction measures themselves

Question 4

Relevance of risk transfers

Answer 4

1. Taxes
   * Reducing the volatility of operating profits reduces the expected tax payments
2. Debt Overhang Problem

• Ex ante financing of losses: insurance/hedging
  
  • reduces probability of debt overhang or financial distress
  • allows higher leverage to exploit tax shield

3. Costly external finance
   * Insurance&Risk managment reduces the need to finance investmens externally

Question 5

Insurance & Moral Hazard

Answer 5

• An insurance policy that compensates for a loss reduces incentives to avoid the loss
• Insurance that compensates for “missing funds” creates incentives to always claim that investment opportunites are great and funds insufficient

Vgl. Derivatives: Information and incentive problems are los

Question 6

Systematisches Risiko

Answer 6

• Terrorism
• Hurricanes
• Earthquakes.,,,

May be correlated with the market portfoli as the occurrence of the event may have a negative impact on the market

• Cannot be fully DIVERSIFIED in the market
• Cost of Capital r_L will include a risk premium
• NEGATIVE BETA

Question 7

Negative Beta Asset

Answer 7

• pays off in bad times
• Insurance for non-diversifiable hazards

r_L risk adjusted rate

• r_L < r_f
• leading to a higher insurance premium
• Versicherungsunternehmen verdient ein erwarteten return r_L < r_f

Question 8

Value of Insurance

Answer 8

• perfect capital market: no benefit to the firm from any financial transactions including insurance
• Value comes from imperfections of capital market:
  • Cost of financial distress & Debt overhang
  • Costly External Capital reduction:
    
    • Insurance provides cash to firm to offset losses
    • reduces need for expensive external capital

Question 9

Market Imperfections

Answer 9

• raise the cost of insurance above the fair price
  
  • taxes, transaction cost
  • Information Risk
    
    • Firm may be better informed
  • Moral Hazard:
    
    • purchasing insurance reduces the firms desire to avoid risk
    • the firm may exaggerate risk
• Perfomance risk
  
  • Versicherung kann nicht zahlen
• Basis risk
  
  • if insurance contract may not completey cover the loss

Question 10

Addressing Market Imperfection

Answer 10

1. Selbstbehalt (Deductible)

• Insurance policy only coers losses in excess of the deductible
• losses up to the deductilbe are borne by the policyholder

–> Reduces Transaction Cost (taxes,..)

2. Obergrenze (Policy Limit):
   * Only covers losses up to the policy limit

Question 11

Derivatives

Answer 11

Options, Future, Swaps

• Hedging Instruments for commodity price risk
  
  • as well as interest rate and exchange rate risks
• Derivatives cover the price risk, but not the quantity risk

Question 12

Collar

Answer 12

• Long Put + Short Call
• Self Financing
• High flexibillity