Lecture Financial risks management - Topic 1: Risk management introduction. In this chapter, students will be able to understand the process of financial risk management (IMM) at financial and non-financial firms. | A Course in Risk Management Instructor: Lou Gattis Topic #1:Introduction: Risk Management Note: bring a financial calculator to each class Objective: understand the process of financial risk management (IMM) at financial and non-financial firms Tent Cards/Seinfeld/Syllabus/Lecture/Enron/Lecture What Do Financial Risk Managers Do? (IMM Framework) Identify risks that affect firm’s viability Market Risks: Equities, FX, Interest Rates, Commodity prices Credit Risks: Counterparty, Bond Default, Loan Default Operational Risks: Legal, Fraud, Physical, Country, etc. Measure exposure to identified risks Positions: Market Value, Notional Amount, Book/Face Value, Impacts: Earnings, Cash Flow, or Value Loss Deterministic: Stress Tests, Scenario Analysis, DV01 Stochastic: VaR, CaR, EaR Mitigate risks Reduce Risk: Unwind, take on offsetting positions (Hedge) Reduce Cost of Risk: Raise Capital / De-lever, Contingent Financing (lines of credit) Accept Risk: Immateriality, Un-hedgable, Unavoidable Question Who works in the area of Corporate Finance? Risk Management Organizations interact with all corporate functional departments VP of Planning Chief Executive Officer Typical Non-Financial Firm Board of Directors Stockholders Chief Financial Officer Chief Administrative Office Departments Departments Operating Divisions Operating Divisions Operating Divisions Controller Treasurer Chief Risk Officer (CRO) Market Risk Credit Risk Operational Risk Risk management is integral in each activity of corporate financial management Find Value Creating Real Investments (NPV>0) ., Plants, New Products, Projects, Acquisitions Ensure cash flow estimates and/or discount rate reflects investment risk Finance Investments Equity, Debt Manage leverage and interest rate risk Implement, Manage, Report on Investments Identify, measure, and mitigate exposure to market and credit risk to protect earnings, capital, and/or cashflows Communicate risks to stakeholders: Executives, Board, Shareholders, Employees Question Who works in the area of Investment Management? Risk management is integral in each activity of Investment Management Find Value Creating Financial Investments ., Equities, Bonds, Derivatives Ensure cash flow estimates and/or discount rate reflects investment risk Finance Investments Equity, Debt Manage leverage and interest rate risk Implement, Manage, Report on Investments Identify, measure, and mitigate exposure to market and credit risk to protect earnings, capital, and/or cashflows Communicate risks to stakeholders: Executives, Board, Shareholders, Employees Chief Financial Officer Chief Investment Officer Back Office Middle Office Front Office Head Trader Equity Head Trader Fixed Income Head Trader Foreign Exchange Risk Management Accounting and Reporting Chief Executive Officer Market Risk Credit Risk Operational Risk Typical Financial Firm Board of Directors Stockholders Risk Management Organizations interact with all investment management departments Question Who works in Banking? Risk management is integral in each activity of Banking Find Value Creating Banking Investments ., Mortgages, Business Loans, HELOCs Ensure interest rates reflect risk of investment Finance Investments Equity, Debt, Deposits Manage leverage and interest rate risk Implement, Manage, Report on Investments Identify, measure, and mitigate exposure to market and credit risk to protect earnings, capital, and/or cashflows Communicate risks to stakeholders: Executives, Board, Shareholders, Employees
