Homework 1
FINA338 Corporate Risk Management
Please answer the questions below on separate sheets and show your steps (no step,
no score). In addition, please write down your seat number beside your name in the
answer sheets.
1. Now is September 2015. Sop
Homework 4
FINA338 Corporate Risk Management
Please answer the questions below on separate sheets and show your steps (no step,
no score).
1. After-Chapter Exercise Q3 on page 481 [Note: (i) calculate the expected after-tax
earnings with and without liabi
Finance 338 Final Review
Exam I
I. Components of Credit Risk
- Current Credit Risk: address whether current obligations will be met
- Potential Credit Risk: associated with a counterparty defaulting at a later date
- Derivatives Credit Risk
o Credit risk
Risk Management and Value Creation II
Related Reading: Chapter 21 (Tax, Regulatory, and Accounting Factors Aecting Corporate Risk
Management)
Dr. Yijia Lin
Objectives
Continue to examine risk management motivations.
Analyze how corporate risk reduction
Risk Measurement II: Value at Risk
Dr. Yijia Lin
Objectives
Review on normal distribution
Properties
Standard normal distribution
Standardization: Z -score
Left-tail probabilities and corresponding Z -scores
Value at Risk
Denition
Characteristics
1. The future price of the April 2011 maturity lean hog contract is 70 cents per
pound. Suppose that when the contract matures in April 2011, the price of hog
turns out to be 65 cents per pounds. Each contract calls for delivery of 40,000
pounds.
a) Calcu
Study Guide for Exam I: Chapters 1 and 3, Class Notes, In-Class Examples and
Exercises, and Homework 1
1. Pure risk and speculative risk
2. Why distinguishes pure risk and speculative risk?
3. Major types of business risk
4. Different loss financing metho
Insurability and Insurance Operations
Related Readings: Chapter 5 (Insurer Ownership, Financial, and Operational Structure), Chapter 10
(Insurability of Risk, Contractual Provisions, and Legal Doctrines) and George E. Rejda (2004, 9th
edition)s Chapters 5
Study Guide for Exam I: Chapters 1 and 3, Class Notes, In-Class Examples and
Exercises, Handouts, Homework 1 and 2
1.
2.
3.
4.
5.
Pure risk and speculative risk and related examples
Why distinguishes pure risk and speculative risk?
Major types of business
FINA338ExamIReviewQuestionsSolution
Q1
a) BecausetheoptionisanEuropeanstyleoption,itcannotbeexercisedpriortoexpiration.
Therefore,thereisnocurrentcreditrisk.
b) Thecurrentvalueofthepotentialcreditrisk(whichisthepresentvalueofwhatMrs.Smith
expectstoreceive
FINA338 Corporate Risk Management
Dr. Yijia Lin
Modern Portfolio Theory
Modern portfolio theory (MPT) proposes how rational investors will use diversification
to optimize their portfolios, and how a risky asset should be priced. MPT models an
assets retur
Risk Identication
Related Reading: Chapter 3 (Risk Identication and Measurement)
Dr. Yijia Lin
Risk Management Process
Identify Loss Exposures
Analyze Loss Exposures
Choose risk management
methods
1. Avoidance
2. Loss Control
Monitor
Risk
Management
Progr
Derivatives Review
Related Reading: Chapter 24 (Hedging with Derivative Contracts)
Dr. Yijia Lin
Derivatives
Denition: nancial instruments whose promised payos are derived from the value of something else,
the underlying
Types of Derivatives
Linear Con
Risk Measurement I
Related Reading: Chapter 3 (Risk Identication and Measurement)
Dr. Yijia Lin
Objectives
Second step in the risk management process
Risk measurement
Location
Dispersion
Skewness
Probability
Evaluating Potential Losses
Loss frequen
Risk Measurement II: Value at Risk
Dr. Yijia Lin
Objectives
Review on normal distribution
Properties
Standard normal distribution
Standardization: Z-score
Left-tail probabilities and corresponding Z-scores
Value at Risk
Denition
Characteristics
T
Risk and Its Management
Related Reading: Chapter 1 (Risk and Its Management)
Dr. Yijia Lin
Class Map
Risk
Methods
Risk Identification
Risk Management
Process
Risk Measurement
Individual Risk Mgt
Business Risk Mgt
Investor Risk Mgt
Objective
Utility
Market
Derivatives Review
Related Reading: Chapter 24 (Hedging with Derivative Contracts)
Dr. Yijia Lin
Derivatives
Denition: nancial instruments whose promised payos are derived from the value of something else,
the underlying
Types of Derivatives
Linear Con
1. Consider a one-year forward contract established at rate of $105. The contract is four
months into its life. The spot price is $108, the risk-free rate is 4.25 percent, and the
underlying makes no cash payments. The two parties decided at the start tha
What is COST OF RISK?
The implicit or explicit price a company must pay to manage its RISK exposures; it is
typically comprised of the expected costs and direct and indirect losses arising from RISK
RETENTION, LOSS CONTROL, LOSS FINANCING, and RISK REDUCT
Commercial Insurance Contracts
Related Readings: (1) Chapter 23 (Commercial Insurance Contracts) 23.1 23.4; (2) Handout on
Commercial General Liability Insurance
Dr. Yijia Lin
Objectives
Overview of contracts and markets
Deductibles and self-insured ret
Alternative Risk Transfer
Related Reading: Chapter 25 (Alternative Risk Transfer)
Dr. Yijia Lin
Risk Management
PROBLEM
DO NOT AVOID
AVOID
DO NOT CONTROL
CONTROL
PREVENT
BOTH
REDUCE
FINANCE
TRANSFER
RETAIN
INSURANC
NON-INSURANCE
Risk Finance
FINANCE
TRANS
Study Guide for Exam I: Chapters 1 and 3, Class Notes, In-Class Examples and
Exercises, Handouts, Homework 1
1.
2.
3.
4.
5.
6.
7.
Pure risk and speculative risk and related examples
Why distinguishes pure risk and speculative risk?
Major types of personal
1. Calculate the mean and standard deviation of an aggregate loss distribution using the
means and variances of frequency and severity distributions
Mean
Standard Deviation (4 steps)
2. Construct an aggregate loss distribution by calculating the probabi
1. Calculate the mean and standard deviation of an aggregate loss distribution using the
means and variances of frequency and severity distributions
Mean add all options up times their probabilities and divide by n
Standard Deviation 1. Find mean 2. Subtr
Risk Identication
Related Reading: Chapter 3 (Risk Identication and Measurement)
Dr. Yijia Lin
Risk Management Process
Identify Loss Exposures
Analyze Loss Exposures
Choose risk management
methods
1. Avoidance
2. Loss Control
Monitor
Risk
Management
Progr
Risk Measurement I
Related Reading: Chapter 3 (Risk Identication and Measurement)
Dr. Yijia Lin
Objectives
Second step in the risk management process
Risk measurement
Location
Dispersion
Skewness
Probability
Evaluating Potential Losses
Loss frequen