Risk Management

Risk Management - Fusing the ART, SCIENCE, and TECHNOLOGY...

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Unformatted text preview: Fusing the ART, SCIENCE, and TECHNOLOGY of Business. RISK Or..How to Improve Decision Making Through Risk Assessment and Risk Management Fusing the ART, SCIENCE , and TECHNOLOGY of Business. Making Financial Decisions - the Corporate Perspective Managers make choices based on best guesses. Sometimes managers seem to make poor choices. Generally those poor choices are caused by incomplete or erroneous information unexpected developments Financial analysis of a firm requires a decision maker to have relevant, useful information. How deeply must the analysis go and to what extent must an analyst use judgment? The answer is it depends and of course the real question is what does it depend on ? The more important the decision the deeper an analyst should go. Fusing the ART, SCIENCE , and TECHNOLOGY of Business. How do Managers define Risk? Risk is uncertainty that matters (Bodie and Merton). In finance, risk leads to uncertainty about the amount and timing of future cash flows. If the stream of future cash flows are known with certainty then judgment becomes unnecessary. For example, simply choose the investment with the highest IRR. Since future cash flows are our best guess we apply a discount rate to accommodate our inability to know the future. The greater our uncertainty the greater the discount rate . Therefore, risk is somewhat accounted for with the application of the correct discount rate. However, the estimate of the risk may be incorrect!!! Choosing the highest IRR why not the highest NPV? a. Professor Dixon has lost his mind and is in error. b. The NPV analysis is defective when cash flows are known. c. Since cash flows are known there is no need to apply a discount rate to adjust the future cash flows and therefore IRR is fine. Fusing the ART, SCIENCE , and TECHNOLOGY of Business. Micro : Industry analysis market structure technological trends substitute products demographic trends emerging markets Macro : interest rates inflation rates foreign exchange rates commodity prices labor supply and costs Step 1: the environmental scan Corporate Analysis starting from the top what the analyst ought to know Where are the risks? Fusing the ART, SCIENCE , and TECHNOLOGY of Business. Step #3 The Firm Identify current resources: products and services current customers assets key employees strategic partners capital access to capital markets Step #2 The System Markets and Institutions equity markets credit markets regulation,tax structure and subsidies derivative markets insurance industry legal system enforcement agencies Where are the risks? Fusing the ART, SCIENCE , and TECHNOLOGY of Business....
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Risk Management - Fusing the ART, SCIENCE, and TECHNOLOGY...

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