Finance School of management Risk management The process of formulating the benefit-cost trade-offs of risk reduction and deciding on the course of action to take .o The appropriateness of a risk-mgmt decision judged in the light of the information available skill or lucky of a decision-maker? uesTc
6 Finance School of Management Risk Management The process of formulating the benefit-cost trade-offs of risk reduction and deciding on the course of action to take ❖ The appropriateness of a risk-mgmt decision: judged in the light of the information available ❖ Skill or lucky of a decision-maker?
Finance School of management Risk exposure Particular types of risk one faces due to ones circumstances Ⅲ lustrations: Farmer: a crop failure and a decline in the price house owner: fire, theft, storm or earthquake damage, a decline of house price mporter/exporter: change of currency exchange rate O Assessing risk exposure in context uesTc
7 Finance School of Management Risk Exposure Particular types of risk one faces due to one’ s circumstances ❖ Illustrations: – Farmer: a crop failure and a decline in the price – house owner: fire, theft, storm or earthquake damage, a decline of house price – Importer/exporter: change of currency exchange rate ⚫ Assessing risk exposure in context
Finance School of management Speculate and Hedge Speculate: taking positions that increase exposures to certain risks Hedge: measures that reduce risk exposures uesTc
8 Finance School of Management Speculate and Hedge ❖ Speculate: taking positions that increase exposures to certain risks ❖ Hedge: measures that reduce risk exposures
Finance School of management Ri ISKS EXposure for Households Sickness disability, and death Unemployment Consumer -durable asset risk Liability risk 5 Financial-asset risk uesTc
9 Finance School of Management Risks Exposure for Households 1. Sickness, disability, and death 2. Unemployment 3. Consumer-durable asset risk 4. Liability risk 5. Financial-asset risk
Finance School of management Risks Facing Firms Production risk Price risk of outputs 3 Price risk of inputs uesTc 10
10 Finance School of Management Risks Facing Firms 1. Production risk 2. Price risk of outputs 3. Price risk of inputs