Chapter10：-An-Overview-o課件

1、Chapter 10: An Overview of Risk ManagementObjective Risk and Financial Decision Making Conceptual Framework for Risk Management Efficient Allocation of Risk-BearingWhat is Risk?Risk and Economic DecisionsThe Risk Management ProcessThe Three Dimensions of Risk TransferRisk Transfer and Economic Effic

2、iencyInstitutions for Risk ManagementPortfolio Theory: Quantitative Analysis for Optimal Risk ManagementProbability Distributions of ReturnsStandard Deviation as a Measure of RiskContentsRoles of Risk ManagementOne of the three analytical “pillars” to financeRisk allocation (redistribution) Concept

3、of RiskUncertainty that mattersIllustration: Preparing foods for your partyGains & losses, “upside” potential & “downside” possibilityRisk AversionA characteristic of an individuals preference in risk-taking situationsExperimentPrefer lower risk given same expected valueDecreasing marginal utility o

4、f incomeRational behavior assumed to be risk-averseA measure of willingness to pay to reducing riskRisk ManagementThe process of formulating the benefit-cost trade-offs of risk reduction and deciding on the course of action to take.The appropriateness of a risk-management decision should be judged i

5、n the light of the information available at the time the decision is made.Skill and lucky in risk management.Risk ExposureParticular types of risk one faces due to ones circumstances (job, business, and pattern of consumption, etc.)Illustrations the risk of a crop failure and the risk of a decline i

6、n the price for a farmerthe risks of fire, theft, storm damage, earthquake damage for a house ownerthe currency risk for a person whose business involves imports or exports of goodsSpeculators and HedgersHedgers: taking positions to reduce their exposures.Speculators: taking positions that increase

7、their exposure to certain risks in the hope of increasing their wealth.The riskiness of an asset or a transaction cannot be assessed in isolation or in abstract.Risks Facing HouseholdsSickness, disability, and deathUnemployment Consumer-durable asset riskLiability riskFinancial-asset riskRisks Facin

8、g FirmsProduction risk and R&D riskPrice risk of outputsPrice risk of inputsThe Risk-Management ProcessA systematic attempt to analyze and deal with riskStepsRisk identificationRisk assessmentSelection of risk-management techniquesImplementationReview Risk IdentificationFiguring out what the most im

9、portant risk exposures are for the unity of analysis.The perspective of the entity as a wholeCareer and stock-market riskThe net exposure to exchange-rate risk of a firm buying inputs and selling products abroadPrice risk and quantity risk of farmsRisk AssessmentThe quantification of the costs assoc

10、iated with the risks that have been identifiedHealth-insurance and actuaries Professional investment advisorsRisk-Management TechniquesRisk avoidanceLoss prevention and controlRisk retentionRisk transferImplementation The basic principle is to minimize the costs of implementation.The lowest premium

11、for health insuranceThe costs of investing in the stock market through mutual fund or a brokerReview Risk management is a dynamic “feedback” process, in which decisions are periodically reviewed and revised.Risk Transfer and Economic EfficiencyTransfering some or all of the risk to others is where t

12、he financial system plays the greatest role.Risk Transfer and Economic EfficiencyInstitutional arrangements for the transfer of risk contribute to economic efficiency in two fundamental ways.To reallocate existing risks to those most willing to bear the risks,To cause a reallocation of resources to

13、production and consumption in accordance with the new distribution of risk-bearing.Efficient Bearing of Existing RisksA retired widow, whose sole source of income is $100,000 in the form of a portfolio of stocks.A college student, who has a wealth of $100,000 in a bank CD.The different attitudes tow

14、ards future and risk.Exchange (swap) their assets. Relative Advantages and Risk Allocation:Interest Rate SWAPFirms with deferring degrees of credit have different costs of financing.The AAA corporation has the relative advantage of financing at the fixed rate, while the BBB corporation has the relat

15、ive advantage of financing at the floating rate.However, BBB may want to finance at a fixed rate and AAA may prefer a floating one.How can we do? LIBOR：London Interbank Offered Rate Basis：0.01%Borrowing at the Advantage Rate11%AAACorp.BBBCorp.investorsinvestorsLIBOR+0.5%SWAP LIBOR-0.20 11.70 11%LIBO

16、RAAACorp.BBBCorp.investorsinvestors11.20%LIBOR+0.5%Credit Risk and Intermediation of Banks LIBOR-0.20（LIBOR-0.10） 11.70（11.80） LIBOR+0.05%LIBOR-0.05%11%11.25%11.15%LIBORAAACorp.BBBCorp.investorsinvestorsbank11.20%LIBOR+0.5%Risk and Resource AllocationA scientist discovers a new drug designed to trea

17、t the common cold.She requires $1,000,000 to develop, test and produce it.At this stage, the drug has a small probability of commercial success.Using her own money or setting up a firm?Risk and Resource Allocationrisk pooling and sharing/specialization in the bearing of risks. By allowing people to

18、reduce their exposure to the risk of undertaking certain business ventures, the function of the financial system to facilitate the transfer of risks may encourage entrepreneurial behavior that can have a benefit to society.Complete Markets for RiskA world in which there exist such a wide range of in

19、stitutional mechanisms that people can pick and choose exactly those risks they wish to bear and those they want to shed. Kenneth Arrow, 1953A hypothetical, ideal worldLimiting case for efficient risk allocationSeparation: production and risk bearingAcceleration of Financial InnovationsInsurance, st

20、ock, and future markets (400 yrs)Debt or equity: design of securities (400 yrs)The supply side New discoveries in telecommunications, information processing, and finance theory have significantly lowered the costs of achieving global diversification and specialization in the bearing of risks.The dem

21、and side Increased volatility of exchange rates, interest rates, and commodity prices have increased the demand for ways to manage risk. Complete markets: not possibleThe Volatility of Exchange Rates(a) The composite exchange rate to US dollarPercentage changeThe Volatility of Interest RtesChanges i

22、n basis points(b) The changes of rate of return on composite long-term investment grade bondReal-world Limitations to Efficient Risk AllocationTransactions costsIncentive problemsmoral-hazard: having insurance against some risk causes the insured party to take greater risk or to take less care in pr

23、eventing the event that gives rise to the loss.adverse selection: those who purchase insurance against risk are more likely than the general population to be at riskThree Dimensions of Risk TransferThe simple way of risk transfer: selling the asset that makes the owner exposed to risk.The three dime

24、nsions of risk transfer: hedging, insuring, and diversifying.HedgingThe action taken to reduce ones exposure to a loss but also causing the hedger to give up the possibility of a gain. Example: farmersOther examplesInsuring Paying a premium to avoid losses but retaining the potential for gain. Examp

25、le: import/export businessOther examples: health insurance, traveling to Jiuzhaigou.DiversifyingHolding similar amounts of many risky assets instead of concentrating all of your investment in only one.Example: investing in the biotechnology businessinitial capital: $100,000probability of success: 50

26、%uncertainty: quadrupling the investment or losing the entire investmentindependence of successes Further Points on DiversificationReduce chances of either big gains or lossesPerfect correlation: do not reduce riskAggregate uncertainty: not reduced“genius”, “dunce” and “average” investors: Good luck

27、 or skill?Basics of Portfolio TheoryA quantitative analysis for optimal risk management. Solve the problem: How to choose among financial alternatives so as to maximize investors given preferences.Optimal choice: trade-offs between higher expected return and greater risk.Returns on GENCO & RISCOReturn Distribution: GraphExpected Return: MeanRisk: Standard DeviationVolatilityStandard deviation of returns.A measure of risk (or uncertainty): The first risk measure (Markowitz, 1952).Volat