systematic and iterative survey of opinions drawn from a panel of experts. Why it is useful § The Delphi Technique helps reduce bias, encourage dialogue between experts and speeds consensus, and reduces the risk that any one person from having undue influence on the opinion of the group. How it works § Experts answer questionnaires in two or more rounds. After each round, a facilitator provides an anonymised summary of the experts' forecasts from the previous round as well as the reasons they provided for their judgments. Thus, experts are encouraged to revise their earlier answers in light of the replies of other members of their panel. § The process is stopped after a predefined stop criterion (e.g. number of rounds, achievement of consensus, stability of results) and the mean or median scores of the final rounds determine the results.
66 Cash Flow at Risk (CFaR) defined (refer COSO) § Cash Flow at Risk is a quantitative risk measure built on a causal model where specific risk factors drive future uncertainty of key financial cash flow or earnings objectives. § Each risk factor is modelled in detail and incorporated into an overall model of the firm’s cash flows or earnings. § Unlike simple budgeting or extrapolating past experiences, CFaR gives insight into the potential variability of future cash flows and earnings. § CFaR answers the question: For a given likelihood how large could the negative consequence be (ie. How low can cash flow and earnings fall?) § A CFaR statistic has three components: a time period (usually one or more multiple years), a confidence level and a loss amount.
67 Used by firms with many material financial risks where the drivers of uncertainty can be modelled statistically. Examples include: § Financial institutions § Energy wholesaling companies § Airlines § Infrastructure projects (eg. Toll roads) § Mining and commodities “Several airlines have built CFaR models reflecting fuel costs, demand, and —in some cases—currency, to measure not only the effectiveness of their hedging positions but also to trade off the financial impact of changes to fuel hedging strategy, adjusting fuel-price pass-through in pricing, and right- sizing the amount of extra cash to keep on hand, all to optimize an overall financial-risk-management strategy. “ Who uses CFaR? Source: McKinsey Working Papers on Risk, Number 51
68 Technical definition of economic capital § EC is the difference between the expected value and worst case value, of earnings or asset values, to a given level of confidence. § EC measures the potential extent of underperformance, relative to expected, due to uncertainties. § It supports ERM and so is defined from the shareholder’s perspective, hence the use of the term “economic”. – A focus on accounting capital would only be concerned only with negative earnings below zero (absolute loss).
You've reached the end of your free preview.
Want to read all 133 pages?
- Spring '18
- risk principles