financial risk mgt 2003

8/7/2019 FINANCIAL RISK MGT 2003

1/27

FINANCIAL

RISK

MANAGEMENT


2/27

INTRODUCTION

DEFINITION

y The process of evaluating and managing current and

possible financial risk at a firm as a method of decreasing

the firm's exposure to the risk.

y Focuses on when and how to hedge using financialinstruments to manage costly exposures to risk.

WHEN TO USE FINANCIAL RISK MANAGEMENT

y Risk which shareholders cannot take

y Unique risks- Best CandidatesWHY TAKE RISKS?

Dividend or interest

Build a diversified Portfolio


3/27

WHAT IS RISK &

TYPES OF RISK

DEFINITION

y Chance that an investment's actual return

will be different than expected.

TYPES OF FINANCIAL RISK

y Credit risk

E.g..: The bankruptcy of a counterparty

y Liquidity risk

E.g..: A temporary inability to convert assets

to cash


4/27

y Systemic risk

If Mr. A defaults then there arrises systemic risk

y Unsystematic Risk

E.g..: News that affects a specific stock such as a

sudden strike by employees.

y Operational risk

E.g.: The HR department takes care of personnel

risks


5/27


6/27

y Identify The Risk Lists of possible risk sources

Risks are then categorized and prioritized

y Assess the risk

Identify The Root Causes

What would cause this risk?

How will this risk impact the project?

y Develop Responses To The Risk

Project team is ready to manage /prevent the risk

y Develop Preventative Measures

Convert into tasks those ideas that were identified

THE RISK ANALYSIS

PROCESS


7/27

STRATEGIES

y Transferring the risk to another party

For Example:

Mr. A Insurance company

y Avoiding the risk:

y Reducing the negative effect & accepting some or

all of the consequences of a particular risk

y Ideal Risk Management

y Intangible risk management

y Faces difficulties allocating resources


8/27


9/27

RISK FROMVARIOUS

PERSPECTIVES

RISK FROMVARIOUS

PERSPECTIVES

RISK TOINVESTORS

RISK TOINVESTORS

RISK TO ANINSURANCECOMPANY

RISK TO ANINSURANCECOMPANY

RISK TOCOMPANYRISK TO

COMPANY


10/27

MANAGING RISK BY INVESTORS

DETERMING RISK OF AN ASSET

STOCKS

BONDS

CASH

SELECTINGRISK

AGE

FINANCIALRESPONSIBILITIES

EVALUATNG SPECIFICINVESTME

T

BUYING

SELLING

Dont put all eggs in one basket


11/27

RISK EXPOSURE TO INVESTORS

When you invest, you take certain risks.

But how do you figure out ahead of time what

those risks might be?

Which ones you are willing to take?

Which ones may never be worth taking?


12/27

RISK FACED BY INVESTORS

Inflation risk

Translation risk

Maturity Risk

Sociopolitical risk

Liquidity risk


13/27

DIVERSIFYING YOUR PORTFOLIO

INVESTMENTPORTFOLIO OF

Mr. B

MUTUALFUNDS

&BONDS

MUTUALFUNDS

&BONDS

REALESTATE

REALESTATE

SHARESSHARES


Mr. A

SHARESSHARES

CASH


14/27

Say, If Mr. A has invested only in Shares & again

he had invested all his shares in XYZ Co. IfShares of XYZ Co. fall then


Mr. A

NO

INCOMEFROMSHARES

NO

INCOMEFROMSHARES


Mr. B

MUTUALFUNDS

&BONDS

MUTUALFUNDS

&BONDS

STOCKS& REALESTATE

STOCKS& REALESTATE

SHARES

SHARES

CASH


15/27


16/27

THE RISK-REWARD

TRADEOFF


17/27

RISK MANAGEMENT

BY

INVESTORS

Mr.A- Fixed Rate

(8%)

Mr. B- Floating Rate

Assumption:

1.Opposite Views

2.You are Mr.A

MR.BBELIEVES

INTERESTRATE TO

MR.A

BELIEVESINTERESTRATE TO


18/27

XYZ BankLtd.

Mr. A

Mr. B

# Change of

interest rate

- Fixed to

floating

#Change of

interest rate-

floating into fixed

rate (8.5%)

INTEREST RATE SWAP

SCENARIO 1

Interest rate to 9.5%

Mr.A gets 9.5% ROI&

Mr. B gets 8.5% ROI

SCENARIO 2

Interest rate to 6%

Mr.A gets 6% ROI&

Mr. B still gets 8.5%


19/27

FINANCIAL RISKS MANAGEMENT BY

INSURANCE COMPANIES

The role of insurers in the financial sector.

Risks contained in the insurers product are not

all borne directly by the insurer itself.

It should accept only those risks that areuniquely a part of the insurers array of services.

Catastrophe risk can be offset somewhat by

undertaking a position in catastrophe futures

and perhaps even in catastrophe bonds.

They can offer products which absorb some

financial risks, while transferring some of these

risks to the purchaser.


20/27

STRATEGIESBY

INSURANCECOMPANIES

STRATEGIESBY

INSURANCECOMPANIES

REINSURANCEREINSURANCE RISKPOOLRISKPOOL


21/27

REINSURANCE

XYZ LTD. has insured its industry against fire with Bajaj Allianz

for Rs.20 crore

Bajaj Allianz feels that the risk is huge

Re-insurance to transfer/spread risk

Finally, risk of 20 crore is divided as follows:

NEW INDIAASSURANCE

RISK-5cr

BAJAJALLIANZ

RISK- 4 cr

ICICILOMBARD

RISK3 cr

NATIONALINSURANCE

RISK- 3 crORIENTAL

RISK- 5 cr


22/27

TERRORISMPOOL

ROYALSUNDARAM

ICICILOMBARD

NEW INDIAASSURANCE

BAJAJALLIANZ

NATIONAL

INSURANCE

COMPANY

OTHER

FOREIGN

COUNTRIES

INSURANCE

COMPANIES


23/27

CASE STUDY- TAJHOTEL

Terrorism is one of the catastrophe risks

that is covered under risk pool

An add-on with property insurance

The trident complex has a total insurance

cover ofRs1,430 crore

Personal accidents and individual deaths

Hotels have their separate liability policies

Leading insurer -Tata AIG general

insurance co.

Co-insurers -ICICI Lombard general

insurance co. LtdIFFCO Tokio general

insurance co. Ltd.

Terrorism claims are settled from a

common pool managed by the state-run

general insurance corporation.


24/27

RISK DIVERSIFICATION BY COMPANY

Specialization by diversification

A company should diversify its knowledge areaand highly concentrate in its products and

market area.

Management risk also known as company risk

For example Reliance industry


25/27

RELIANCE INDUSTRY PRIVATE LIMITED

RelianceIndustry

Power Insurance

Retailsector

Mutualfunds

Infrastructue

Communication


26/27

Risk controls measure Diversification

The principal ideas is that if any Reliance sector

goes devalue,other Reliance sectors will cop up

with it.

Diversification also helps in getting profitability

to company


27/27

CONCLUSION

Financial risk management is one of the core

components of financial management study.

Financial Risk management help you reach aserious managerial position, it also makes you

deal with money better.

It has become a common practise in financialinstitutions protect against the adverse effects of

uncertainty

financial risk mgt 2003

Documents