Corporate Risk Management
- Know main features of firm-wide risk management
- Know key risk-management procedures applicable to market, operational and credit risks
- Know how and when to use risk management procedures
- Be able to classify risks
- Be able to Evaluate risk exposure
- Be able to Describe the process of risk measurement, risk aggregation, performance evaluation, capital allocation and strategic decision making
- Topic 1.The Role of Risk Management.The evolution of risk management. Creating value with risk management (reducing distress costs, funding disruptions, taxes, stakeholder costs, managerial incentives, large shareholders, planning costs).The firm wide risk management: the Enterprise Risk Management (ERM) approach. Risk monitoring versus managing risk. The building blocks of ERM. Identification of risk. Sources and types of risk (market, credit and operational).Risk mapping.
- Topic 2.Measuring Market Risks.Exposure measurement. Expected and unexpected loss. Value-at-Risk (VaR).Volatility and correlations. Delta‐normal valuation. Riskmetrics™ approach. Historical simulation. Monte Carlo simulation methods. Implementation and model risk. Back testing of VaR. Derivatives and VaR. VaR and fat tails. Expected shortfall and other tail risk measures. VaR in the presence of liquidity risks. Applications of VaR and other risk measures to non-financial corporations. EaR and CFaR. Corporatemetrics™. Stress testing and scenario analysis.
- Topic 3. Managing Market Risks.Managing currency risk. Measuring interest rate risks. Duration and convexity. Duration VaR. Managing commodity risk. Currency and interest rate derivatives. Swaps, caps and floors. Exotic structures and hybrid securities.
- Topic 4. Measuring and Managing Credit Risk.Probability of default, loss given default and recovery rates. Credit scoring. Credit spreads. Contingent claim approach (Merton’s model) and the KMV Model. CreditMetrics™ and CreditRisk+. Default and default‐time correlations. Risk mitigation techniques (including netting, rating triggers, and collateral). Credit derivatives, credit default swaps (CDS) and credit-linked notes.
- Topic 5. Operational Risk Measurement.Financial risks besides market and credit risk. Risks due to deficiencies or mistakes from information systems and technologies, internal procedures, personnel, external events. Operational internal (incompetency /fraud, model/transaction risk, info systems, software, data bases) and external (environmental factors, change in political and regulatory regime).Specifics of operating risks. The top-down approach. The bottom-up approach. Key indicators. P&L volatility and distribution unexplained by market and credit risks. Measure losses using conditional probabilities. Management of operation risks. Internal control system (general policy by top management, assessment of risks, control procedures, current monitoring).
- Topic 6. Firm‐wide Risk Management Framework.Cost of bearing and reducing risk across the firm (marginal and optimal).Definition of risk capital. Using a risk measure to set the optimal amount of capital. Risk aggregation. Estimating a firm-wide loss distribution. Correlations across market, credit, and operational risk. Allocation of risk capital across the firm. RAROC models. Applications of RAROC to evaluation of efficiency of work (backward-looking), optimal capital distribution (forward-looking), information for the stakeholders, managerial compensation. Risk measures and investment policy. Evaluating the performance of risk management systems. Risk measures and compensation. Strategic decisions. Evaluating strategic risks. Reallocating price risk to facilitate strategic acquisitions. Sources of value creation. Real options and their applications in corporate risk management. Failures in risk management. Future trends in corporate risk management.
- Case studies (team work)You should work together in teams of 4-5 on your cases, and should hand in a joint solution with all of your names on it. There are 4 in-class case studies.
- Final exam
- Промежуточная аттестация (4 модуль)0.7 * Case studies (team work) + 0.3 * Final exam