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
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 n
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 a
Frequency
# of claims
probability Loss
0
0.5
1
0.2
2
0.3
Severity
probility
500
0.33
3000
0.33
5000
0.33
A:
Frequency
Mean: 0*0.5+1*0.2+2*0.3
0.8
# of claims
probability
0
0.5 Vaiance: 0.5*(0-0.8)^2+0
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 managem
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 correspondi
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
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 t
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
R
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
FINA338ExamIReviewQuestionsSolution
Q1
a) BecausetheoptionisanEuropeanstyleoption,itcannotbeexercisedpriortoexpiration.
Therefore,thereisnocurrentcreditrisk.
b) Thecurrentvalueofthepotentialcreditrisk
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 r
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.
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
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
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 correspondin
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
Busin
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
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
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
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
R
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
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
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 a
A
1
Frequency
2
# Claims
B
C
D
E
F
G
H
Severity
Probability
Cumm
Loss
Probability
Cumm
3
0
50%
50%
500
33.33%
4
1
20%
70%
3000
33.33%
66.67%
5
2
30%
100%
5000
33.33%
100.00%
33.33%
6
7
Question A
8
Fr
Insurability and Insurance Operations
Related Readings: Chapter 5 (Insurer Ownership, Financial, and Operational Structure), Chapter 10
(Insurability of Risk, Contractual Provisions, and Legal Doctrin
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.