Rm 07-v1

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Rm 07-v1

  1. 1. Risk ManagementUniversity of Economics, Kraków, 2012 Tomasz Aleksandrowicz
  2. 2. financial risk management financial risks types
  3. 3. sources of financial risks• organization’s exposure to changes in market prices, such as interest rates, exchange rates, and commodity prices• 2. Financial risks arising from the actions of, and transactions with, other organizations such as vendors, customers, and counterparties in derivatives transactions• 3. Financial risks resulting from internal actions or failures of the organization, particularly people, processes, and systems
  4. 4. financial risk overview• market risks – equity price risk – interest rate risk – foreign exchange risk – commodity price risk• credit risk – transaction risk – portfolio concentration risk• liquidity risk – `funding liquidity risk – asset liquidity risk
  5. 5. market risk equity price risk interest rate riskforeign exchange riskcommodity price risk
  6. 6. equity price risk• risk resulting from holding equities or assets with performance tied to equity prices• faced by all organizations possessing or issuing equities
  7. 7. interest rate risk• risk resulting from volatility of interest rates• faced by all companies with borrowings (affecting cost of funds) – loan with fixed rate of interest – loan with floating (variable) rate of interest• impact depends on company structure / relation of: – capital and debt (leverage ratio) – short and long term debt – fixed and floating rate debt
  8. 8. foreign exchange rate risk• risk resulting from change in the exchange rate of one currency against another• faced by all organizations involved in foreign exchange or utilizing commodities denominated in other currency
  9. 9. commodity price risk• risk resulting from commodity prices rising or falling• faced by all organizations that produce or purchase commodities
  10. 10. derivatives
  11. 11. Portfolio creation approach 12
  12. 12. diversification (I)• diversification means reducing risk by investing in a variety of assets• it means: dont put all your eggs in one basket• diversified portfolio will have less risk than the weighted average risk of its elements• often less risk than the least risky of its parts• crucial element is selection of assets with low correlation• correlaton values:[-1,1] 13
  13. 13. two assets portfolio 14
  14. 14. two assets portfolio 15
  15. 15. divrsification (II)• specific risk and systematic risk• individual, specific securities are much more risky than the market• specific risk can be lowered by diversification• systematic risk is a limit for diversification efficiency – can not be elimitnated by diversification 16
  16. 16. Diversification (III) 17
  17. 17. Asset specific risk – variance / sd• specicfic risk could be measured by variance and standard deviation of the asset• sd and var how far a set of numbers are spread out from each other (from mean/expected value)• variance:• standard deviation (sq root ov variance): 18
  18. 18. Assets historical return and sdBased on annual returns from 1926-2004 Avg. Return Std Dev.Small Stocks 17.5% 33.1%Large Co. Stocks 12.4% 20.3%L-T Corp Bonds 6.2% 8.6%L-T Govt. Bonds 5.8% 9.3%U.S. T-Bills 3.8% 3.1% 19
  19. 19. Asset systematic risk - beta factor• systematic risk can be measured as the sensitivity of a stock’s return to fluctuations in returns on the market portfolio• the systematic risk is measured by the beta coefficient, or β.• variation in asset/portfolio return depends on return of market portfolio % change in asset return b= % change in market return 20
  20. 20. Beta Factor Interpretation• if b = 0 – asset is risk free• if b = 1 – asset return = market return• if b > 1 – asset is riskier than market index if b < 1 – asset is less risky than market index 21
  21. 21. Beta Factor Sample (5 yr)Stock BetaAmazon 3.30DellComputer 2.14GE 1.18Ford 1.05Delta Airlines 1.00PepsiCo .67McDonalds .66Pfizer .57ExxonMobil .41H.J.Heinz .31 22
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