Corporate Risk Management
2022
,Inhoudsopgave
1 PART I: INTRODUCTION............................................................................................................................... 4
1.1 Risk, Uncertainty & Risk Management..........................................................................................................4
1.1.1 Introduction to risk and uncertainty......................................................................................................4
1.1.2 Types of uncertainty...............................................................................................................................4
1.1.3 Overview major risks..............................................................................................................................5
1.1.4 Financial Risks.........................................................................................................................................5
1.1.5 Non-Financial Risks.................................................................................................................................6
1.1.6 Mini Case: Palm......................................................................................................................................6
1.1.7 Enterprise Risk Management (ERM).......................................................................................................7
1.1.8 ERM 5 dimensions..................................................................................................................................7
1.1.9 Risk frameworks.....................................................................................................................................9
1.1.10 Current major global risks: introduction..............................................................................................9
1.1.11 Interconnectedness of risks..................................................................................................................9
1.1.12 Exercises, practitioners’ corner & active learning..............................................................................10
1.2 The Value of Risk Management...................................................................................................................11
1.2.1 Modigliani‐Miller (MM) world: the irrelevance of corporate risk management .................................11
1.2.2 Manager’s perspective.........................................................................................................................11
1.2.3 Shareholders perspective.....................................................................................................................12
1.2.4 Stakeholders perspective.....................................................................................................................16
1.2.5 Exercises, practitioners’ corner & active learning................................................................................16
2 PART II...................................................................................................................................................... 17
2.1 Corporate interest rate risk management...................................................................................................17
2.1.1 Major Learning Outcomes....................................................................................................................17
2.1.2 Importance of interest rate risk management.....................................................................................17
2.1.3 Interest rate risk exposure....................................................................................................................21
2.1.4 Management of interest rate risk.........................................................................................................21
2.1.5 Advanced interest rate risk instruments..............................................................................................24
2.2 Corporate foreign exchange risk management...........................................................................................25
2.2.1 Major learning outcomes.....................................................................................................................25
2.2.2 Importance of corporate FX risk management: currency depreciations.............................................25
2.2.3 FX risk management in practice...........................................................................................................25
2.2.4 Foreign exchange exposure..................................................................................................................26
2.3 Corporate foreign exchange risk management: Transaction exposure.......................................................28
2.3.1 Major learning outcomes.....................................................................................................................28
2.3.2 Transaction exposure...........................................................................................................................28
2.3.3 The concept of foreign currency hedging.............................................................................................28
2.3.4 Why Hedge? Impact of Hedging on the Expected Cash Flows of the Firm..........................................29
2.3.5 Management of transaction exposure.................................................................................................30
2.3.6 Case Manufacturing firm transaction exposure...................................................................................31
2.3.7 Comparison of hedging strategies........................................................................................................36
2.4 Corporate foreign exchange risk management: Economic exposure..........................................................37
2.4.1 Major learning outcomes.....................................................................................................................37
2.4.2 Economic exposure: concept................................................................................................................37
2.4.3 Measuring economic exposure............................................................................................................38
2.4.4 Management of economic exposure....................................................................................................40
2.5 Corporate foreign exchange risk management: Translation exposure........................................................46
2.5.1 Major Learning Outcomes....................................................................................................................46
2.5.2 Translation exposure: concept.............................................................................................................46
2.5.3 Translation methods and FX rate.........................................................................................................47
2.5.4 Managing Translation Exposure...........................................................................................................48
, 2.5.5 Prepare: Case Porsche..........................................................................................................................49
2.6 Corporate credit risk management..............................................................................................................50
2.6.1 Major Learning Outcomes....................................................................................................................50
2.6.2 Outline..................................................................................................................................................51
2.6.3 Concept of credit risk: definition..........................................................................................................51
2.6.4 Sources of credit risk............................................................................................................................51
2.7 Business credit risk management................................................................................................................52
2.7.1 The credit decision................................................................................................................................53
2.7.2 Measuring business credit risk: approaches........................................................................................54
2.7.3 Managing business credit risk..............................................................................................................55
2.7.4 Operational techniques........................................................................................................................56
2.7.5 Credit default swap...............................................................................................................................57
2.8 Counterparty credit risk management.........................................................................................................57
2.8.1 Counterparty credit risk: concept.........................................................................................................57
2.8.2 Measuring counterparty credit risk......................................................................................................58
2.8.3 Managing counterparty credit risk.......................................................................................................58
, 1 PART I: INTRODUCTION
1.1 Risk, Uncertainty & Risk Management
1.1.1 Introduction to risk and uncertainty
• Uncertainty
o A state of not knowing whether a proposition is true or false.
o All future events have some intrinsic uncertainty.
• Risk
o No universal definition, despite its importance.
• Formal approach: Risk = {(si , p (fi ), xi )}, i =1, 2, ..., N.
• with s = scenario; x = consequence (i.e. measure of damage).
• p (fi ) = probability density function of scenario frequency.
• Enterprise risk management perspective
• COSO : “risk is the possibility that events will occur and affect
the achievement of objectives”
• ISO: “the effect of uncertainty on objectives”
o Risk measure: mathematical method for computing risk.
o Risk measurement: summary number that captures risk which is obtained by
applying data to a risk measure.
1.1.2 Types of uncertainty
2022
,Inhoudsopgave
1 PART I: INTRODUCTION............................................................................................................................... 4
1.1 Risk, Uncertainty & Risk Management..........................................................................................................4
1.1.1 Introduction to risk and uncertainty......................................................................................................4
1.1.2 Types of uncertainty...............................................................................................................................4
1.1.3 Overview major risks..............................................................................................................................5
1.1.4 Financial Risks.........................................................................................................................................5
1.1.5 Non-Financial Risks.................................................................................................................................6
1.1.6 Mini Case: Palm......................................................................................................................................6
1.1.7 Enterprise Risk Management (ERM).......................................................................................................7
1.1.8 ERM 5 dimensions..................................................................................................................................7
1.1.9 Risk frameworks.....................................................................................................................................9
1.1.10 Current major global risks: introduction..............................................................................................9
1.1.11 Interconnectedness of risks..................................................................................................................9
1.1.12 Exercises, practitioners’ corner & active learning..............................................................................10
1.2 The Value of Risk Management...................................................................................................................11
1.2.1 Modigliani‐Miller (MM) world: the irrelevance of corporate risk management .................................11
1.2.2 Manager’s perspective.........................................................................................................................11
1.2.3 Shareholders perspective.....................................................................................................................12
1.2.4 Stakeholders perspective.....................................................................................................................16
1.2.5 Exercises, practitioners’ corner & active learning................................................................................16
2 PART II...................................................................................................................................................... 17
2.1 Corporate interest rate risk management...................................................................................................17
2.1.1 Major Learning Outcomes....................................................................................................................17
2.1.2 Importance of interest rate risk management.....................................................................................17
2.1.3 Interest rate risk exposure....................................................................................................................21
2.1.4 Management of interest rate risk.........................................................................................................21
2.1.5 Advanced interest rate risk instruments..............................................................................................24
2.2 Corporate foreign exchange risk management...........................................................................................25
2.2.1 Major learning outcomes.....................................................................................................................25
2.2.2 Importance of corporate FX risk management: currency depreciations.............................................25
2.2.3 FX risk management in practice...........................................................................................................25
2.2.4 Foreign exchange exposure..................................................................................................................26
2.3 Corporate foreign exchange risk management: Transaction exposure.......................................................28
2.3.1 Major learning outcomes.....................................................................................................................28
2.3.2 Transaction exposure...........................................................................................................................28
2.3.3 The concept of foreign currency hedging.............................................................................................28
2.3.4 Why Hedge? Impact of Hedging on the Expected Cash Flows of the Firm..........................................29
2.3.5 Management of transaction exposure.................................................................................................30
2.3.6 Case Manufacturing firm transaction exposure...................................................................................31
2.3.7 Comparison of hedging strategies........................................................................................................36
2.4 Corporate foreign exchange risk management: Economic exposure..........................................................37
2.4.1 Major learning outcomes.....................................................................................................................37
2.4.2 Economic exposure: concept................................................................................................................37
2.4.3 Measuring economic exposure............................................................................................................38
2.4.4 Management of economic exposure....................................................................................................40
2.5 Corporate foreign exchange risk management: Translation exposure........................................................46
2.5.1 Major Learning Outcomes....................................................................................................................46
2.5.2 Translation exposure: concept.............................................................................................................46
2.5.3 Translation methods and FX rate.........................................................................................................47
2.5.4 Managing Translation Exposure...........................................................................................................48
, 2.5.5 Prepare: Case Porsche..........................................................................................................................49
2.6 Corporate credit risk management..............................................................................................................50
2.6.1 Major Learning Outcomes....................................................................................................................50
2.6.2 Outline..................................................................................................................................................51
2.6.3 Concept of credit risk: definition..........................................................................................................51
2.6.4 Sources of credit risk............................................................................................................................51
2.7 Business credit risk management................................................................................................................52
2.7.1 The credit decision................................................................................................................................53
2.7.2 Measuring business credit risk: approaches........................................................................................54
2.7.3 Managing business credit risk..............................................................................................................55
2.7.4 Operational techniques........................................................................................................................56
2.7.5 Credit default swap...............................................................................................................................57
2.8 Counterparty credit risk management.........................................................................................................57
2.8.1 Counterparty credit risk: concept.........................................................................................................57
2.8.2 Measuring counterparty credit risk......................................................................................................58
2.8.3 Managing counterparty credit risk.......................................................................................................58
, 1 PART I: INTRODUCTION
1.1 Risk, Uncertainty & Risk Management
1.1.1 Introduction to risk and uncertainty
• Uncertainty
o A state of not knowing whether a proposition is true or false.
o All future events have some intrinsic uncertainty.
• Risk
o No universal definition, despite its importance.
• Formal approach: Risk = {(si , p (fi ), xi )}, i =1, 2, ..., N.
• with s = scenario; x = consequence (i.e. measure of damage).
• p (fi ) = probability density function of scenario frequency.
• Enterprise risk management perspective
• COSO : “risk is the possibility that events will occur and affect
the achievement of objectives”
• ISO: “the effect of uncertainty on objectives”
o Risk measure: mathematical method for computing risk.
o Risk measurement: summary number that captures risk which is obtained by
applying data to a risk measure.
1.1.2 Types of uncertainty
