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CFS C13TX: Corporate Risk Management (Five-step corporate risk management…
CFS C13TX: Corporate Risk Management
Five-step corporate risk management process
Step 1: Identify and understand the firm's major risks
demand risk
commodity risk
country or political risk
operational risk
foreign-exchange risk
Step 2: Decide which types of risks to keep and which to transfer
Step 3: Decide how much risk to assume
risk profile
Step 4: Incorporate risk into all the firm's decisions and processes
Step 5: Monitor and manage the risks the firm assumes
managing risk with insurance contracts
insurance
is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium
a. Types of Insurance contracts
property insurance
business interruption insurance
key person life insurance
directors and officers insurance
workers' compensation insurance
b. why purchase insurance?
self insurance
managing risks by hedging with forward contracts
The term
hedging
refers to a strategy designed to offset the exposure to price risk
A
spot contract
is an exchange in which the buyer and seller agree upon a price and complete the exchange immediately
a. Hedging commodity price risk using forward contracts
b. Hedging currency risk using forward contracts
c. Limitations of forward contracts
credit risk exposure
sharing of strategic information
market values of negotiated contracts are not easily determined
managing risk with exchange-traded financial derivatives
A
derivative contract
is a security whose value is derived from the value of another asset or security (which is referred to as the underlying asset)
a. Future contracts
commodity futures
financial futures
i. Managing default risk in futures markets
futures margin
marking to market
ii. hedging with futures
basis risk
b. Options contracts
call option
option contract
put option
option writing
exercise or striking price
option premium
option expiration date
American option
European option
i. A graphical look at option pricing relationships
ii. Reading option price quotes
valuing options and swaps
a. The Black-Scholes Option pricing model
i. key variables in the Black-Scholes Option Pricing Equation
ii. the price of the underlying stock
iii. the option's exercise or strike price
iv. the length of time left until expiration
v. the expected stock price volatility over the life of the option
vi. the risk-free rate of interest -Principle 1: Money has a time value
vii. the underlying stock's dividend yield
viii. The Black-Scholes option pricing equation
b. Swap contracts
interest rate swap
currency swap
notional principal
Summary