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Agenda
5:45 6:30
Course Introduction
6:30 7:15
7:30 8:30
Risk Concepts
Course Introduction
Chuck Brobst
C.Brobst@gfmsolutionsgroup.com
Learning Objectives
Theory
To become
To provide
To address
Learning Objectives
Learn
Both
There
Course Grade
based on attendance
5%
Work done for this course must adhere to the University Academic Integrity
Policy, which you can review in the Graduate Student Handbook or by
visiting:
http://www.depaul.edu/university-catalog/academic-handbooks/Pages/defa
6
ult.aspx
.
Day
Jan 5
Jan 12
Jan 19
Jan 26
Feb 2
Proposed Topics
Overview of Risk Management,
Mechanism, responsibilities, and
governance.
Assignment
Lam, Ch. 1-3
Barton Ch. 2
Lam, Ch. 13
Barton Ch. 5 Microsoft
Homework #1 due
Class slides. Textbooks
covering the subject
available for loan upon
request.
Homework #2 due
Lam, Ch. 14
Day
Feb 9
Feb 16
Feb 23
Mar 2
10
Mar 9
EXAM
Mar 16
Proposed Topics
Assignment
Lam, Ch. 9
Lam, Ch. 10
Barton, Ch. 3 Chase
Manhattan
Risk quantification - Credit Risk
Lam, Ch. 12
Quantitative Approaches & Concepts, Lam, Ch. 13
Risk adjusted returns,
Model Risk
Homework #3 assigned
Governance and Oversight
Homework #3 due
Risk-based decision making
Lam, 5
Lam, Ch. 24
Mini-Quiz 2
Role of Board
Enterprise Risk Management
Final Examination
Elements
5%
of grade is attendance
Mandatory
Collaborative
homework reviews
One
Case
study discussion
Questions
9
10
No risk, no return
The capacity to manage risk (i.e., appetite for risk with forward
choices) is a key element in driving the economic system forward
11
12
Managements
job
Despite
Reduce
Reduces
returns
Maximize
shareholder value
Empirically
Promote
13
Enterprise-Wide Risks
Financial
Risk
Unexpected
Business
Risk
Unexpected
Operational
Risk
Unexpected
14
interdependency = correlation
Unified
Enterprise-level
Enables
Effective
Identify
reporting
Cross-pollination
Competitive
of insights
advantage
15
Enterprise-Wide Risks
Business
Financial
Operational
Some are
opportunities
16
18
New client has the legal rights that were unintended and
substantially reduce the revenue opportunity of the
relationship
19
20
the risk
Require
Raise
Disclose
risks to stakeholders
Educate
21
Chinese philosopher: smart person learns from their mistakes and a wise person
learns from the mistakes of others
dialogue with peers, competitors through industry and function related events
Discussion
Review
process
Ascertain
Develop
causes
prevention procedures
22
How?
Education
Dialogue
E.g.,
Incentives
Link
2.
3.
4.
5.
6.
7.
24
Shared responsibility
Major risks
ALL employees
Diversify people and processes to prevent any one person or group from
gaining excessive power to take risks
Failures
Anecdote
26
Failures
27
Market risk
Tenor limits
Greeks
Duration
Credit risk
Counterparty limits
Risk rating
Country (Sovereign)
28
Sales standards
Product disclosures
Employment practices
Hiring
Termination
ERM policy
Revenue metrics
AND
Risk metrics
32
Science
Behaviors
Processes
Commitment
Systems
Communication
Reporting
Statement of guiding
principles
Reinforcement of
positive
Art
People
Skills
Culture
Values
Incentives
33
Types of Risk
Credit
Market
Operational
Business
Liquidity
Legal/Reg.
Strategic
Reputation
Systemic
34
Risk Concepts
Exposure
Volatility
Probability
Severity
Time Horizon
Correlation
Capital
35
$10,000,000
exposure
estimate
deviation
38
For certain risk types, volatility and probability of risk are directly and
easily related
In many cases, the risky event is the result of a progression of intermediate steps
Example: The risk of EUR depreciation such that the EURUSD exchange rate moves
from 1.2000 to 1.1000
For other risk types, the probability of risk episodes is very low, but the
impact is devastating and the outcome is binary
i.e. the event happens without partially impacting the company along the way
Probability (contd)
Example: The risk of EUR depreciation such that the EURUSD exchange rate
moves from 1.2000 to 1.1000
1.21
EUR|USD=1.20
1.19
In
Market risk
Credit risk
42
Market risk: the longer the exposure, the more time for
market outcomes to deviate from the expected outcome
43
44
45
Hedging only one of two offsetting exposures will actually increase a companys
aggregate exposure to loss
Correlation (contd)
47
Correlation (contd)
Portfolio volatility =
48
Correlation (contd)
Portfolio volatility =
49
Correlation (contd)
B
1.00
0.30
(0.60)
C
0.30
1.00
(0.80)
(0.60)
(0.80)
1.00
Portfolio volatility =
50
Two purposes
Cover
required investment
Cover
unexpected losses
Another
In
Probability of survival
Capital intensive business units must generate greater profit to meet hurdle
returns on capital
Risk Processes
Risk Awareness
Risk Measurement
Evaluation
Do
nothing
Mitigate
Evaluate Performance
53
Risk Awareness
Objectives
Communication
Processes
Set tone
Ask questions
metrics, strategies
Training
Risk Measurement
Limitations
Key Elements
Risk/return metrics
Risk Control
Support profitability
Control downside