What Risks and Why Manage Them?. Why Risk Management? Higher Risk due to: Inflation/DisInflation Volatility of FX Rates Volatility of Interest Rates.

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Presentation transcript:

What Risks and Why Manage Them?

Why Risk Management? Higher Risk due to: Inflation/DisInflation Volatility of FX Rates Volatility of Interest Rates

Impact on Firms Transaction Exposure: Commodity Price Risk Foreign Exchange Risk Financing Exposure Interest Rate Risk

Market Response Commodity Prices Futures, Options, Swaps, Exotics Foreign Exchange Futures, Options, Swaps, Exotics Interest Rates Futures, Options (Caps & Floors), Swaps, Exotic Debt

Reasons exist for active financial risk management SMOOTH EARNINGS!!! Match Supply of Internally-generated funds with Demand for funds for Capital Expenditures Match Employee’s incentives with Investors Match Information Advantage with Transaction Ability & Cost of Transaction

Risk Programs Identification of risk sources Evaluation of bearing risk vs. transfer, and competitive response Creation of financial positions to transfer –Position description –Standardized vs. Proprietary positions –Pricing through arbitrage Position maintenance and review

Debacles Gibson Greeting Cards 1993 Metallgesellschaft 1993 Proctor & Gamble 1993 Orange County Barings Bank 1995 Long Term Capital Management 1998