Lecture Managerial finance - Chapter 23 provides knowledge of risk management. This chapter presents the following content: Risk management and stock value maximization, fundamentals of risk management.
Trang 11
Chapter 23
Risk Management
Trang 22
Topics in Chapter
Risk management and stock value maximization.
Fundamentals of risk management
Trang 33
How can risk management increase the value of a corporation?
Risk management allows firms to:
Have greater debt capacity, which has a larger tax shield of interest payments
Implement the optimal capital budget
without having to raise external equity in years that would have had low cash
flow due to volatility
(More )
Trang 44
Risk management allows
firms to:
Avoid costs of financial distress
Weakened relationships with suppliers.
Loss of potential customers.
Distractions to managers.
Utilize comparative advantage in
hedging relative to hedging ability of
investors
(More )
Trang 55
What is corporate risk
management?
Corporate risk management is the
management of unpredictable events
that would have adverse consequences for the firm
Trang 66
Different Types of Risk
Speculative risks: Those that offer the chance of a gain as well as a loss
Pure risks: Those that offer only the prospect of a loss
Demand risks: Those associated with the demand for a firm’s products or
services
Input risks: Those associated with a firm’s input costs
(More )
Trang 77
Financial risks: Those that result from financial
transactions.
Property risks: Those associated with loss of a firm’s productive assets.
Personnel risk: Risks that result from human actions.
Environmental risk: Risk associated with polluting the environment.
Liability risks: Connected with product, service, or
employee liability.
Insurable risks: Those which typically can be
covered by insurance.
Trang 88
What are the three steps of
corporate risk management?
Step 1 Identify the risks faced by the firm
Step 2 Measure the potential impact of the identified risks
Step 3 Decide how each relevant risk should be dealt with
Trang 99
What are some actions that companies
can take to minimize or reduce risk
exposures?
Transfer risk to an insurance company
by paying periodic premiums
Transfer functions which produce risk to third parties
Purchase derivatives contracts to
reduce input and financial risks
(More )
Trang 1010
Take actions to reduce the probability of occurrence of adverse events
Take actions to reduce the magnitude of the loss associated with adverse
events
Avoid the activities that give rise to risk
Trang 1111
What is financial risk
exposure?
Financial risk exposure refers to the risk inherent in the financial markets due to price fluctuations
Example: A firm holds a portfolio of
bonds, interest rates rise, and the value
of the bonds falls
Trang 1212
What actions can companies take
to reduce property and liability
exposures?
Both property and liability exposures can be accommodated by either self insurance or passing the risk on to an insurance company
The more risk passed on to an insurer, the higher the cost of the policy.
Insurers like high deductibles, both to lower their losses and to reduce moral hazard
Trang 1313
How can diversification reduce
business risk?
By appropriately spreading business
risk over several activities or operations, the firm can significantly reduce the
impact of a single random event on
corporate performance.
Examples: Geographic and product
diversification
Trang 1414
What is financial risk
exposure?
Financial risk exposure refers to the risk inherent in the financial markets due to price fluctuations
Example: A firm holds a portfolio of
bonds, interest rates rise, and the value
of the bonds falls
Trang 1515
Financial risk management
concepts
Duration: Average time to bondholders'
receipt of cash flows, including interest and principal repayment. Duration is used to help assess interest rate and reinvestment rate
risks.
Immunization: Process of selecting durations for bonds in a portfolio such that gains or
losses from reinvestment exactly match gains
or losses from price changes.