Essentials of Financial Risk Management E-Book

Karen A. Horcher

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Essentials Series
• Sprache: Englisch

Seitenzahl: 296

Veröffentlichungsjahr: 2011

Beschreibung

A concise introduction to financial risk management strategies, policies, and techniques This ideal guide for business professionals focuses on strategic and management issues associated with financial risk. Essentials of Financial Risk Management identifies risk-mitigation policies and strategies; suggestions for determining an organization's risk tolerance; and sources of risk associated with currency exchange rates, interest rates, credit exposure, commodity prices, and other related events. Examples illustrate risk scenarios and offer tips on an array of management alternatives, including changes in the way business is conducted and hedging strategies involving derivatives.

Leseprobe

Contents

Preface

Acknowledgments

Chapter 1: What Is Financial Risk Management?

What Is Risk?

How Does Financial Risk Arise?

What Is Financial Risk Management?

Factors that Impact Financial Rates and Prices

Factors that Affect Foreign Exchange Rates

Factors that Affect Commodity Prices

Financial Risk Management: A Selective History

Summary

Chapter 2: Identifying Major Financial Risks

Interest Rate Risk

Foreign Exchange Risk

Commodity Risk

Credit Risk

Operational Risk

Other Types of Risk

Summary

Chapter 3: Interest Rate Risk

Forward Rate Agreements

Interest Rate Futures

Interest Rate Swaps

Interest Rate Options

Summary

Chapter 4: Foreign Exchange Risk

Forward Contracts

Swaps

Currency Futures

Foreign Exchange Options

Summary

Chapter 5: Credit Risk

How Credit Risk Arises

Credit Exposure Management

Credit Derivatives

Summary

Chapter 6: Commodity Risk

Historical References

Fixed-Rate Contracts

Types of Participants

Commodities Markets

Commodity Forwards and Futures

Commodity Options

Summary

Chapter 7: Operational Risk

How Operational Risk Arises

Operational Considerations

Special Issues in Managing Operational Risk

Industry Recommendations

Summary

Chapter 8: Risk Management Framework: Policy and Hedging

Risk Profile of an Organization

Risk Management Policy

Summary

Chapter 9: Measuring Risk

Measures of Exposure

Value-at-Risk

Credit Risk Measurement

Operational Risk Measurement

Summary

Chapter 10: Global Initiatives in Financial Risk Management

Challenges

Settlement Initiatives

Trading Initiatives

Payment Initiatives

Capital Adequacy Initiatives

Accounting and Regulatory Initiatives

Summary

Appendix

Index

Essentials Series

The Essentials Series was created for busy business advisory and corporate professionals. The books in this series were designed so that these busy professionals can quickly acquire knowledge and skills in core business areas.

Each book provides need-to-have fundamentals for those professionals who must:

Get up to speed quickly, because they have been promoted to a new position or have broadened their responsibility scopeManage a new functional areaBrush up on new developments in their area of responsibilityAdd more value to their company or clients

Other books in this series include:

Essentials of Accounts Payable, Mary S. Schaeffer

Essentials of Balanced Scorecard, Mohan Nair

Essentials of Capacity Management, Reginald Tomas Yu-Lee

Essentials of Capital Budgeting, James Sagner

Essentials of Cash Flow, H. A. Schaeffer, Jr.

Essentials of Corporate Performance Measurement, George T. Friedlob, Lydia L. F. Schleifer, and Franklin J. Plewa, Jr.

Essentials of Cost Management, Joe and Catherine Stenzel

Essentials of Credit, Collections, and Accounts Receivable, Mary S. Schaeffer

Essentials of CRM: A Guide to Customer Relationship Management, Bryan Bergeron

Essentials of Financial Analysis, George T. Friedlob and Lydia L. F. Schleifer

Essentials of Financial Risk Management, Karen A. Horcher

Essentials of Intellectual Property, Paul J. Lerner and Alexander I. Poltorak

Essentials of Knowledge Management, Bryan Bergeron

Essentials of Patents, Andy Gibbs and Bob DeMatteis

Essentials of Payroll Management and Accounting, Steven M. Bragg

Essentials of Shared Services, Bryan Bergeron

Essentials of Supply Chain Management, Michael Hugos

Essentials of Trademarks and Unfair Competition, Dana Shilling

Essentials of Treasury, Karen A. Horcher

Essentials of Managing Corporate Cash, Michele Allman-Ward and James Sagner

Essentials of XBRL, Bryan Bergeron

For more information on any of these titles, please visit www.wiley.com.

Copyright © 2005 by Karen A. Horcher. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax [phone], or online at http://www.wiley.com/go/permission.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

Notice to readers:

The material contained is provided for informational purposes. The subject matter is complex and must be tailored to individual situations. Although the materials have been prepared with care, errors or mistakes may have inadvertently occurred. In addition, rates and transactions may be purely fictitious. Hedging may not be appropriate in all circumstances. If expert assistance is required, the services of a competent professional should be sought.

For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993, or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books.

For more information about Wiley products, visit our Web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Horcher, Karen A. Essentials of financial risk management / Karen A. Horcher.

p. cm. —(Essentials series) Includes index.

ISBN-13 978-0-471-70616-8 (pbk.)

ISBN-10 0-471-70616-7 (pbk.)

1. Risk management. 2. Financial futures. I. Title. II. Series.

HD61.H58 2005

658.15’5—dc22

2004029115

For Uncle Jimmy

Preface

Financial markets are a fascinating reflection of the people behind them. Usually interesting, occasionally irrational, markets take on a life of their own, moving farther and faster than models predict and sometimes concluding with events that are theoretically unlikely.

There is tremendous value in a qualitative, as well as a quantitative, approach to risk management. Risk management cannot be reduced to a simple checklist or mechanistic process. In risk management, the ability to question and contemplate different outcomes is a distinct advantage.

This book is intended for the business or finance professional to bridge a gap between an overview of financial risk management and the many technical, though excellent, resources that are often beyond the level required by a nonspecialist.

Since the subject of financial risk management is both wide and deep, this volume is necessarily selective. Financial risk is covered from the top down, to foster an understanding of the risks and the methods often used to manage those risks.

The reader will find additional sources of information in the appendix. Of course, no book can serve as an alternative to professionals who can provide up-to-the-minute guidance on the many legal, financial, and technical challenges associated with risk management.

Acknowledgments

My approach to risk is unavoidably influenced by my experience as a trader. I had the good fortune to be in a good place at the right time and to learn from others who willingly shared their experience. I am most grateful to the many people who have offered me a helping hand, encouragement, or inspiration along the way, including my clients.

My appreciation goes to Bernice Miedzinski and Melanie Rupp for their helpful insight and perspectives, and to Stephanie Sharp for her support. Many thanks to Sheck for providing me with the opportunity. Special thanks are due to Paul for his encouragement and strength, and to Ashley.

CHAPTER 1

What Is Financial Risk Management?

After reading this chapter you will be able to

Describe the financial risk management processIdentify key factors that affect interest rates, exchange rates, and commodity pricesAppreciate the impact of history on financial markets

Although financial risk has increased significantly in recent years, risk and risk management are not contemporary issues. The result of increasingly global markets is that risk may originate with events thousands of miles away that have nothing to do with the domestic market. Information is available instantaneously, which means that change, and subsequent market reactions, occur very quickly.

The economic climate and markets can be affected very quickly by changes in exchange rates, interest rates, and commodity prices. Counterparties can rapidly become problematic. As a result, it is important to ensure financial risks are identified and managed appropriately. Preparation is a key component of risk management.

What Is Risk?

Risk provides the basis for opportunity. The terms risk and exposure have subtle differences in their meaning. Risk refers to the probability of loss, while exposure is the possibility of loss, although they are often used interchangeably. Risk arises as a result of exposure.

Exposure to financial markets affects most organizations, either directly or indirectly. When an organization has financial market exposure, there is a possibility of loss but also an opportunity for gain or profit. Financial market exposure may provide strategic or competitive benefits.