Risk Management: Challenge and Opportunity

Przednia okładka
Michael Frenkel, Ulrich Hommel, Markus Rudolf
Springer Science & Business Media, 23 lis 2004 - 838

Dealing with all aspects of risk management that have undergone significant innovation in recent years, this book aims at being a reference work in its field. Different to other books on the topic, it addresses the challenges and opportunities facing the different risk management types in banks, insurance companies, and the corporate sector. Due to the rising volatility in the financial markets as well as political and operational risks affecting the business sector in general, capital adequacy rules are equally important for non-financial companies. For the banking sector, the book emphasizes the modifications implied by the Basel II proposal. The volume has been written for academics as well as practitioners, in particular finance specialists. It is unique in bringing together such a wide array of experts and correspondingly offers a complete coverage of recent developments in risk management.

 

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Spis treści

Basel II and the Effects on the Banking Sector
3
11 Why Do We Need a More Sophisticated Banking Supervision?
5
2 The Standardized Approach
6
3 The Internal RatingsBased Approach
9
312 The Risk Components
10
313 The Risk Weight Function
13
32 The IRB Approach for the Retail Asset Class
17
4 Consequences of Basel II
19
33 Using Risk Management to Encourage and Protect Firm Specific Investments
428
34 Using Risk Management to Monitor and Control Managers
430
35 Using Risk Management to Improve Decision Making and Capital Budgeting
431
4 Back to Berle and Means
432
5 Summary and Conclusions
434
Integrating Corporate Risk Management
437
2 How Does Risk Management Add Value?
439
3 Measuring the Value of Risk Management
441

42 Consequences for the Banking Industry
22
Conflicts of Interest and Market Discipline in Financial Services Firms
25
1 A Conflict of Interest Taxonomy
27
11 Conflicts of Interest in Wholesale Financial Markets
28
12 Conflicts of Interest in Retail Financial Services
31
13 WholesaleRetail Conflicts
33
2 Conflicts of Interest and Strategic Profiles of Financial Firms
36
21 Potential Conflicts of Interest in Multifunctional Client Relationships
37
3 Constraining Exploitation of Conflicts of Interest
40
32 MarketDiscipline Constraints
43
33 Intersection of Regulation and MarketBased Constraints
45
4 Conclusion
47
Risk Management and Value Creation in Banks
53
1 Introduction
54
3 RAROC as Capital Budgeting Rule in Banks
60
32 Definition of RAROC
61
33 Assumptions and Deficiencies of RAROC
64
4 Overview of New Approaches
65
5 Implications of the New Approaches on Risk Management and Value Creation in Banks
67
51 Implications for Risk Management Decisions
68
52 Implications on Capital Budgeting Decisions
71
6 Foundations for a Normative Theory for Risk Management in Banks
72
7 Conclusion
74
The New Basel Capital Accord
79
2 VaR Calculation
81
3 Regulatory Reporting VaR and Capital Requirement
89
4 Internal vs Standard Model
91
5 Credit Risk
94
6 Operational Risk
97
Regulatory and Other Applications Methods and Criticism
99
Definition and Risks of Concern
100
12 Applications and Regulatory Background
101
Methods and Inherent Sources of Inaccuracy
103
21 Deltanormal and Deltagamma Approach
104
Historical and Monte Carlo Simulation
107
3 Risk Reduction and Capital Allocation Within a Value at Risk Framework
109
31 Minimizing Value at Risk
110
32 Allocating VaR to Business Units
112
4 Shortcomings of Value at Risk as a Measure of Risk
114
5 Conclusion
121
Parsimonious Value at Risk for Fixed Income Portfolios
125
11 A Simple Example
126
12 The Key Rate Duration Model
130
13 The Level Slope and Curvature LSC Model
133
14 LSC Risk Analysis
137
15 Conclusion
140
Risk Budgeting with Value at Risk Limits
143
1 Introduction
144
2 Definition of Value at Risk Limits
145
3 The Structure of the Simulation Models
147
4 Adjusting Risk Limits for Time Horizons and Profits and Losses
148
5 Incorporating Asset Correlations Into Risk Budgets
150
6 Conclusion and Practical Implications
153
Value at Risk Bank Equity and Credit Risk
159
2 A Banking Firm
160
21 The Economic Setting
161
22 The Stochastic Setting
162
23 Value at Risk and the Banks Profit
163
4 Value Maximization and Bank Equity
164
5 Conclusion
166
Parametric and Nonparametric Estimation of Conditional Return Expectations
169
1 Introduction
170
2 Parametric versus Nonparametric Regression A Simple Derivation
172
An Unusual Representation of OLS
174
23 Nonparametric Regression Analysis
176
24 The Multivariate Case
181
25 Bandwidth Selection for Nonparametric Regression Estimators
182
3 Data Description
183
4 Empirical Results
185
42 Outofsample Results
189
5 Conclusion
193
An Overview
197
111 Economic Capital
198
112 Capital Allocation
199
13 Loss Distribution
200
15 Portfolio Transactions
201
212 Loss Given Default
202
215 Event Versus Time Series Correlation
203
22 Output
204
223 Expected Shortfall
205
224 Coherent Risk Measures
206
227 Contribution to Expected Shortfall
207
31 Actuarial Approach
208
3 12 Dependence
209
32 Structural Approach
210
322 Dependencies
211
323 Loss Distribution
213
324 Extensions
215
4 Summary
216
Evaluating Credit Risk Models
219
2 Backtests Based on the Frequency of Tail Losses
221
3 Backtests Based on Loss Density Forecasts
225
4 Forecast Evaluation Approaches to Backtesting
231
5 Conclusion
236
Estimation of Default Probabilities and Default Correlations
239
2 Estimation of Default Probabilities
240
22 MultiPeriod Case
246
23 MultiGroup Case
247
3 Estimation of Default Correlation
249
32 Estimation in a General Bernoulli Mixture Model
250
33 Estimation in a SingleFactor Model
253
4 Simultaneous Estimation
255
42 SingleFactor Model
256
5 Conclusion
257
Managing Investment Risks of Institutional Private Equity Investors The Challenge of llliquidity
259
2 Measuring Private Equity Returns and Risk
261
21 Asset Value Based Returns
263
22 Smoothed Proxy Observations
264
23 Noisy Smoothed Proxy Observations
266
24 Cash Flow Based Returns
267
3 Risk Management and Asset Allocation
270
31 Specific Issues in Risk Management
271
32 Specific Issues in Asset Allocation
273
4 Conclusion
274
Assessment of Operational Risk Capital
279
1 The Operational Risk Capital Model
281
11 Frequency Severity and the Loss Distribution
283
12 Operational Risk Capital Calculation
286
2 Dealing with Operational Risk Data
289
22 Data Filtering and Scaling
290
23 Risk SelfAssessment
293
24 DataOriented AMA
294
31 Identification of Dependencies
295
32 The Effect of Dependencies on the Aggregate ORC
296
33 Aggregating Operational Risks with Other Risks
298
4 Summary and Conclusions
299
The Management Perspective
303
1 Introduction
304
11 Commonly Practiced Approaches to OpRisk
305
12 Pitfalls on the Road to AMA Compliance
306
13 Inefficiencies in AM A Compliance Management
310
14 Desirable SideEffects in OpRisk Management
311
15 Priorities and Maximized Value in OpRisk Management
313
16 Generic Roadmap towards Effective OpRisk Management
315
17 Conclusions and Recommendations
316
Insurance Risk Management
319
Private and Public Risk Management Strategies
321
1 Introduction
322
2 Insurancelinked Securities
324
3 State Guarantees for Catastrophic Risk?
331
4 Problems with Catastrophe Insurance Demand
335
5 Conclusion
336
New Approaches to Managing Catastrophic Insurance Risk
341
2 CATLinked Securities A New Asset Class
345
3 Traditional and ARTBased CAT Reinsurance
347
4 Optimizing the Issuers Risk Portfolio
350
5 Risk Management Strategies Using CATLinked Securities
352
51 ExPost Capital Provision and Funding Cost Reduction with CATlinked Bonds
353
6 Valuation Issues
359
7 Concluding Remarks
361
Alternative Risk Transfer
369
2 SelfInsurance Captives and the Emergence of ART
370
21 SingleParent Captives
371
22 Other CaptiveLike Structures
373
222 RentACaptives and Protected Cell Companies
374
3 Finite Risk
375
32 Potential Benefits to Corporates
377
33 The AIGBrightpoint SEC Settlement
378
4 MultiLine Programs and Risk Bundling
379
41 Overcoming SilobySilo Inefficiency
380
42 A Mixed Record
382
5 MultiTrigger Programs
383
6 Structured Finance Solutions
384
62 Risk Securitization
385
63 Future Flow Securitization
387
7 Contingent Capital
388
8 Conclusion
389
The Challenge of Managing Longevity Risk
391
2 Establishing the Relevance of Longevity Risk to the Insurance Industry
392
3 Economic Reasons for the Relnsurance Gap
396
31 Difficulties in Forecasting Longevity Trends
397
32 Adverse Selection
398
33 Moral Hazard
399
34 Absence of Diversification and Hedging Opportunities
400
4 Possible Solutions for Longevity Risk Relnsurance
401
42 Finite Reinsurance Solutions
402
43 Capital Market Solutions
403
5 Conclusion
404
A ValueatRisk Approach in the Presence of Interest Rate Guarantees
407
1 Introduction
408
2 The Model and its Calibration
410
3 The Case of German Life Insurance Companies
411
4 Pure Market Values of Assets
412
5 Book Values of Assets
413
6 The Riskless Asset
414
7 Summary
417
Probable Minimum Return
418
Conversion of Market Values into Book Values
419
Corporate Risk Management
421
Risk Management Corporate Governance and the Public Corporation
423
2 Scientific Theoretical Perspective on Risk Management
424
Why Firms Should Manage Risk
426
32 Reducing Financial Distress and Bankruptcy Costs
427
4 Identifying a Firms Collective Risks
443
5 Interactions Between Risk Management Financial Structure and Operating Decisions
444
6 Integrated Products
446
7 Risk Management and Managerial Incentive Problems
449
ValueBased Motives for Corporate Risk Management
455
2 The Irrelevance Theorem of ModiglianiMiller MM
456
3 ValueBased Motives for Corporate Risk Management
458
31 Raising the Efficiency of Financial Contracting
459
311 Shareholders vs Management
460
312 Creditors vs Shareholders
462
32 Reducing the Corporate Tax Burden
466
33 Reducing Transaction Costs
468
332 Transaction Cost of Hedging
469
34 Selecting the Optimal Risk Portfolio
470
35 Coordinating Financial and Investment Policies
471
4 Conclusion
474
ValueBased Corporate Risk Management
479
2 Tasks and Elements of Corporate Risk Management Overview
482
22 Analyzing Risks
484
24 Coping with Risks
486
3 Risk Cost of Capital and Shareholder Value
487
32 Enterprise Value and Capital Costs in Efficient Markets
488
33 Model Criticism
489
34 Deriving Realistic Cost of Capital Rates8
490
35 Further Consequences of Inefficient Capital Markets
491
4 Conclusion
492
Implementation Issues for the NonFinancial Sector
495
A Holistic Approach
497
22 Chance Risk and their Dimensions
498
23 The Process of Entrepreneurial Chance and Risk Management
499
231 The ChanceRiskStrategy
500
232 ChanceRiskIdentification
501
233 The ChanceRiskAnalysis
502
234 The ChanceRiskReporting
503
235 ChanceRiskManagement
506
236 ChanceRiskMonitoring
507
24 The ProcessExternal Monitoring and Revision Function
508
A Comprehensive Approach to the Measurement of Macroeconomic Exposure
513
2 Exposure Coefficients
515
3 The Choice of Dependent Variable
517
4 The Choice of Independent Variables and Time Horizon
519
5 Volvo Cars7
520
6 Results Interpretations and the Use of Coefficients
524
62 Exposure to Macroeconomic Shocks
526
63 Exposure under Pegged versus Flexible Exchange Rates
527
64 What Has Financial Exposure Management Achieved?
528
65 Financial Structure as a Hedge Against Macroeconomic Exposure
529
7 Using Estimated Coefficients for Future Periods
530
8 Concluding Remarks and the Use of MUST Analysis in External Reporting
533
An Empirical Analysis
537
Measurement and Management of ForeignExchange Risk
539
3 Methodology of the Empirical Study
541
4 Results of the Empirical Study
543
42 ExchangeRiskManagement Strategies
545
43 The Use of ForeignExchangeRate Forecasts
549
44 Organization of ExchangeRate Management
550
45 Further Arguments and Hypotheses on ExchangeRisk Management
551
5 Conclusion
553
Evidence from an Event Study Methodology
557
2 Sample Selection and Event Study Methodology
560
3 Event Study Measures of Exchange Rate Exposure
562
4 Determinants of Exchange Rate Exposure
564
5 Conclusion
568
A Comparison of Three Major Airlines
571
1 Introduction1
572
2 The Current Situation of the Airlines
574
22 United Airlines Background Information
577
23 Qantas Background Information
578
4 Income Statements
580
5 Corporate Risk Drivers
582
6 Hedging Strategies
585
7 Simulation Results
587
8 Conclusion
589
Real Options and Financial Hedging
591
1 Identification and Classification of Risks
592
2 Rationales for Managing Risk
594
3 Using Derivatives and Other Contracts to Manage Risk
597
4 Using Real Options to Hedge and Exploit Risk
599
5 Using Real versus Financial Options for Hedging
601
6 Creating an Integrated Risk Management Strategy
603
7 Conquering Risk
605
The Real Option Value of Operational and Managerial Flexibility in Global Supply Chain Networks
609
1 Introduction
610
2 The Benefit of Operational Flexibility
611
22 Supply Chain Network Cost Optimization
612
222 The International Twostage Supply Chain Network Model
613
23 Profit Maximization
614
25 Transfer Pricing
615
26 Knowledge Management
616
3 The Option Value of Managerial Flexibility
617
31 Demand Risk
618
312 The Option Value of Managerial Flexibility under Demand Risk
619
373 MonteCarlo Simulation Study
620
322 World Pricing
623
325 MonteCarlo Simulation Study
624
4 Summary
626
The EONPowergen Case
631
2 Currency Risk Exposures in CrossBorder Acquisitions
633
21 Currency Exposure Defined
634
22 Contingent Exposure
635
23 Translation Exposure1
636
3 Introducing an AcquisitionRelated Approach to Managing Currency Risk Exposures
637
31 Exposure Identification
638
32 Policy Formulation
639
33 Exposure Measurement
640
34 Exposure Monitoring and Reporting
641
35 Exposure Control
642
351 Foreign Debt
643
352 Currency Options
644
353 Currency Forwards Futures and CrossCurrency Swaps
646
354 Acquisition Companies
647
4 Concluding Remarks
648
The Case of Electricity Derivatives
651
2 Building on New Paradigms
652
21 The Integration of the Markets is Accelerating
653
22 Consolidation of European Market Infrastructures
654
23 A New Understanding of Roles New Technologies and New Abilities Need a Different Form of Capitalization
657
3 New Risk Classes in Electricity
659
32 Competition in the Electricity Industry
660
33 Opportunities Offered by an Electricity Exchange
661
35 Determinants of Power Prices and Related Risks
662
36 Limitations of BlackScholes With Respect to Electricity
663
Reshaping the Power Industry
664
42 Price Discovery in Bilateral and Exchange Markets
666
43 Reshaping of the Energy Industry has Begun
667
5 Transfer to Other Risk Classes
668
Was Enrons Business Model Fundamentally Flawed?
671
Business Practices Brought to Light Subsequent to Oct 16 2001
672
4 The Aftermath of Enron for Merchant Energy
674
6 Was Enrons Business Model Fundamentally Flawed?
676
Opportunities and Limits of ConsumptionBased Strategies
679
2 ConsumptionOriented Utility Functions
680
3 Onassis Decision Problem Reconsidered
682
4 Consumption Oriented Utility and International Invitations for Tenders
684
42 Capital Market Data
686
43 Entrepreneurial Data
687
44 Risk Management Situations
690
442 Active Risk Management Only att 0
692
5 Conclusion
697
Convergence of Supply Chain Management and Financial Asset Management
699
Emergence of Forward Buying Contractual Flexibility and Risk Hedging
700
22 LongTerm Investment vs ShortTerm Flexibility
701
23 Contractual Flexibility
705
24 Management of Demand Uncertainty
707
3 Capacity Options and Risk Management
709
31 A Model for Capacity Options
710
32 Risk Hedging via Flexibility Contracts
711
33 Trading Opportunities for Flexibility Contracts
713
34 Contract Portfolios
714
4 Summary
715
Systemic Issues of Risk Management
719
Management
721
2 Some Examples of Financial Debacles
723
22 Daiwa Bank
725
23 Sumitomo Corporation
727
3 Conceptualizing Debacles and their Prevention
729
4 Conclusion
734
Allied Irish Bank
735
Economic Risks of EMU
741
1 Introduction
742
2 Risks Stemming from Excessive Government Borrowing
743
3 Risks of High Adjustment Costs Stemming from European Labor Markets
750
4 Risks Associated with EMU Enlargement
758
5 Risks in EMU Financial Markets
759
6 Conclusion
761
Does Risk Management Make Financial Markets Riskier?
765
1 Introduction
766
2 Market Risk as a Regulatory Concern
767
3 The Measurement of Market Risk
768
32 VaR as an Amplifier of Volatility?
770
4 Some Empirical Results on Volatility in Major Stock Markets
772
42 Estimation Results
780
5 Conclusion
781
A Macro View
785
1 Introduction
786
2 Incentives towards Rational Herding of Institutional Investors
787
3 Evidence on Herding of Fund Managers
788
4 Survey Findings on Herd Behavior
790
42 Relation between the Perception of Herding and the Institutional Investors Characteristics
792
43 Perception of Herding and the Sources of Information
794
5 Consequences for the Management of Macro Risks
796
Japans Big Bang Reform
801
2 Demise of the High Growth Period and Birth of the Bubble Economy
803
3 The Japanese Big Bang Financial Overhaul
805
4 Reforming the Financial System
806
41 Shift toward the BusinessCategory Subsidiary System
807
42 Legalization of Financial Holding Companies
808
5 Revitalization through Coordination and Consolidation
810
6 Risk Management by Deferred Tax Accounting
815
7 A Case of Major Banks Default Risk Avoiding by Nationalization
817
8 Future of Japans Big Bang Financial Reform
819
Authors
821
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