Financial Risk Management E-Book

Frank J. Fabozzi

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Global Finance Executive Select
• Sprache: Englisch

Seitenzahl: 40

Veröffentlichungsjahr: 2010

Beschreibung

Created by the experienced author team of Frank Fabozzi and Pamela Peterson Drake, Financial Risk Management examines the essential elements of this discipline and makes them accessible to a wide array of readers-from seasoned veterans looking for a review to newcomers needing to get their footing in finance. Financial risk is the exposure of a corporation to an event that can cause a shortfall in a targeted financial measure or value and includes market risk, credit risk, market liquidity risk, operational risk, and legal risk. This material discusses the four key processes in financial risk management: risk identification, risk assessment, risk mitigation, and risk transferring. The process of risk management involves determining which risks to accept, which to neutralize, and which to transfer.

Leseprobe

Contents

Cover

Title Page

Copyright

CHAPTER 16: Financial Risk Management

RISK DEFINED

ENTERPRISE RISK MANAGEMENT

MANAGING RISKS

RISK TRANSFER

SUMMARY

REFERENCES

Copyright © 2009 by John Wiley & Sons, Inc. All rights reserved.

Disclaimer. This content is excerpted from Finance: Capital Markets, Financial Management and Investment Management, by Frank Fabozzi (978-0-470-40735-6, 2009), with permission from the publisher John Wiley & Sons. You may not make any other use, or authorize others to make any other use of this excerpt, in any print or non-print format, including electronic or multimedia.

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.

This chapter examines the four key processes in financial risk management: risk identification, risk assessment, risk mitigation, and risk transferring. The process of risk management involves determining which risks to accept, which to neutralize, and which to transfer. The responsibility of risk management is often delegated to either (1) the audit, finance, or compliance committee of the company’s board of directors; or (2) a risk management officer (typically called the chief risk officer) or a risk management group headed by a risk management officer. Regardless of the structure, to assure effective performance of the risk management process, the committee or group responsible for risk management should have regular interaction with the chief financial officer, internal auditors, general counsel, and managers of business units.

Derived from Fabozzi, Frank. Finance: Capital Markets, Financial Management and Investment Management. Hoboken, NJ: John Wiley & Sons, Inc., 2009. 978-0-470-40735-6.

978-1-118-00645-0978-0-470-94480-6

CHAPTER 16

Financial Risk Management

All firms face a variety of risks. Scandals such as Enron, WorldCom, Tyco, and Adelphia and tragic events such as 9/11 have reinforced the need of companies to manage risk. Moreover, risk management should not be placed at the end of the agenda for a board meeting as “other business,” but be a key agenda item that is discussed regularly at board meetings. In practice, the board can provide only oversight and direction. The responsibility of risk management is often delegated to either (1) the audit, finance, or compliance committee of the company’s board of directors; or (2) a risk management officer (typically called the chief risk officer) or a risk management group headed by a risk management officer. Regardless of the structure, to assure effective performance of the risk management process, the committee or group responsible for risk management should have regular interaction with the chief financial officer, internal auditors, general counsel, and managers of business units.

In this chapter we discuss the four key processes in financial risk management: risk identification, risk assessment, risk mitigation, and risk transferring. The process of risk management involves determining which risks to accept, which to neutralize, and which to transfer.

RISK DEFINED

There is no shortage of definitions for risk. In everyday parlance, risk is often viewed as something that is negative. But we know that some risks lead to economic gains while others have purely negative consequences. For example, the purchase of a lottery ticket involves an action that results in the risk of the loss equal to the cost of the ticket but potentially has a substantial monetary reward. In contrast, the risk of death or injury from a random shooting is purely a negative consequence.

In the corporate world, accepting risks is necessary to obtain a competitive advantage and generate a profit. In fact, “risk” is derived from the Italian verb riscare, which means “to dare.” Corporations “dare to” generate profits by taking advantage of the opportunistic side of risk.1 The former Delaware Supreme Court Chief Justice Norman Veasey (2000, pp. 26–27) in a decision wrote:

Potential profit often corresponds to the potential risk. . . . Stockholders’ investment interests . . . will be advanced if corporate directors and managers honestly assess risk and reward and accept for the corporation the highest available risk-adjusted returns that are above the firm’s cost of capital.