1 Risk Intro

8/16/2019 1 Risk Intro

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INTRODUCTION TO RISK &

RISK MANAGEMENT

Damodaran/ch.1,2,3

1


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Contnt!

1. Som "am#$!

2. %hat ! r!'(

3. Contn)o)! r!'! *!. E*nt r!'!+. Rc$a!!-n contn)o)! r!'!

. 0)rthr c$a!!caton o r!'!

. Con!)nc! o r!' & m#$caton!4. 0)rthr rc$a!!caton o r!'

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Contnt!5

6. %h- !ho)$d 7 mana r!'(

8. Manamnt o r!'

19.:a$)n a!!t! )ndr n;)nc or!'

11.R!' ad


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1. Som E"am#$!

• =)!n!! r!'! > n*!tmnt! / o#raton!• 0nanca$ r!'! > ?orro7n & $ndn

• 0nanca$ n*!tmnt r!'! > ca#ta$

$o!!! / an!• Gam?$n & $ottr! >$o!!! / an!

• @ro!!ona$ haard!

•

Untm$- dath o #r!on!• Sc'n!! / D!a! / In


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Th 0oron Im#$!

• % cannot do ?)!n!! 7tho)tr!'

•

R!' ! ?oth ?ad & ood or?)!n!!• % cannot $* 7tho)t r!'

• R!' ! B? ?)!n!!


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oa o !Manamnt

• Th oa$ ! NOT to $mnat r!'.%h-(

• Th oa$ ! to mantan r!' at a#rdtrmnd $*$ o acc#ta?$t-and ma"m! th rt)rn!


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2. %hat ! R!'(

• It ! #r!nt n !t)aton! that ha*m)$t#$ o)tcom! and !om or a$$ oth o)tcom! ma- ? ad*r!

• S)ch !t)aton! ar rrrd to a!"#rmnt!

• Th *aro)! #o!!?$ o)tcom! ma-

? 'no7n ?)t cannot ? #rdctd7th crtant-

.. Dath or !c'n!! o an

nd*d)a$, $o!!! d) to nat)ra$ 4


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Som E!!nta$ E$mnt! o R!'

1. M)$t#$ o)tcom!

2. Som or a$$ o th o)tcom! ma-? ad*r!

3. Occ)rrnc o an- o th #o!!?$o)tcom! cannot ? #rdctd 7thcrtant-

+. Or th ordr n 7hch th o)tcom!7$$ occ)r cannot ? #rdctd 7thcrtant-

. A chanc actor ! a!!ocatd 7th 6


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2. %hat ! R!'5

• So Dnn r!' ha! t7oa!#ct!F

–@ro?a?$t! o crtan*nt! occ)rrn

–Con!)nc! o th *nt!

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Thrat! & R!'!

• Earth)a', ;ood, dra)ht,trror!m ar threats and not

r!'!• %h- (

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2AF %h- ! R!' Im#ortant(

• R!' ca)!! drnt "tnt o a*r!on ndrnt nd*d)a$! $adn to drntconomc choc!

• It ! th nat)ra$ racton to th #r!nco r!' n th dc!on ma'n !cnaro

• It act! conomc choc! o nd*d)a$!& n!tt)ton!

• Th hhr th r!' th hhr ! th r!'Ha*r!on and th hhr ! th m#act onconomc choc! 11


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2AF %h- ! R!' Im#ortant(

• R!' ha! m#ortantcon!)nc! orF

–In*!tmnt choc!

–Cor#orat 0nanc

–:a$)aton

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2AF %h- ! R!' Im#ortant5

In*!tmnt choc!F

3 a!#ct! o n*!tmnt dc!on

ma'n>• A!!t a$$ocatonF

Ca!h/=ond!/Stoc'!• A!!t !$cton

• @rormanc *a$)atonF a. o7

do 7 ma!)r r!'( ?. o7 13


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Cor#orat 0nancF

3 ma

• In*!tmnt ca#ta$"#ndt)r!

• 0nancn d?t *!. )t-

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:a$)aton o a!!t!• R!' act! A!!t @rcn

•

A! t ! n th ra$ 7or$d, t ma-? / not ? don ratona$$-

• Ratona$ *a$)aton ! $'$- to$ad to an!

• Irratona$ *a$)aton ! $'$- to

$ad to $o!!! 1


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3. Contn)o)! R!' *!. E*ntR!'

• %hat ! contn)o)! r!'(

• %hat ! *nt r!'(

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3. Contn)o)! R!' *!. E*ntR!'5

• Contn)o)! r!'! ar tho! 7hch tnd toocc)r & act at a$$ tm!

• Thr ! com#$t crtant- 199J

#ro?a?$t- that !)ch r!'! 7$$ ha* ano?!r*a?$ / #rc#t?$ m#act at an-#rod o tm

• Th m#act can ? ad*r! / a*o)ra?$

• E. E"chan rat *o$at$t-, Intr!t rat*o$at$t-, In;aton, Stoc' mar't *o$at$t-,Commodt- #rc *o$at$t-

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3 C t R E t


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3. Cont n)o)! R ! *!. E*ntR!'5

•

E*nt r!'! a'a D!crt r!'! 7o)$d notman!t thm!$*! or $on tm #rod! H th-7$$ !)ddn$- occ)r n !om tm #rod

• Th #ro?a?$t- o occ)rrnc n an- #rod ! $o7

• Th conomc con!)nc! o !)ch r!'! arnra$$- !ro)!, ad*r!, d*a!tatn, $adn

to 7d!#rad dama! / $o!!!

• E. Nat)ra$ ca$amt! act! o od H c-c$on,

arth)a'!, ;ood!, r! @o$tca$ *nt! 7ar,chan o #o7r, rot!, natona$!aton Trror!m Accdnt

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3. Contn)o)! R!' *!. E*ntR!'5

Continuous risk Event risk

Ect*contn)o)!$- o*r

tm

Ect* atr $ona#! o tm

Occ)rrnc n an-tm #rod ! crtan> 199J #ro?a?$t-

Occ)rrnc n an-tm #rod ! hh$-)ncrtan > L!! than

199J #ro?a?$t-*r- !ma$$

Ma- $ad to ?oth$o!!! & an!

%$$ a$7a-! $ad toha*- $o!!!

So)rcF Mar't /Econom So)rc!Ftro no)!18


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+. Rc$a!!-n Contn)o)!R!'!

• Contn)o)! r!'! can ? rc$a!!drom an n*!tmnt #r!#ct* ntoF

1. R!'! n "d ncom a!!t!

2. R!'! n *ara?$ ncom a!!t!

• R!'! o ?oth t-#! o a!!t! ar!rom mar't

• =)t th- ar actd ?- drntmar't actor!

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+. Rc$a!!-n Contn)o)!R!'!

• 0"d ncom a!!t! ar actd ?-ntr!t rat *o$at$t-

• :ara?$ ncom a!!t! ar actd?- *o$at$t- o r)rd rt)rn! on*!tor!

• =oth t-#! o actor! ca)! ca#ta$

an! & $o!!! n th *a$) o tha!!t! h$d

• R!)$tF 0a*o)ra?$ / Ad*r! m#act

on n*!tor! 7a$th 21


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. 0)rthr C$a!!caton oR!'!

• R!'! or *ara?$ ncom a!!t! can? )rthr c$a!!d ntoF

1. S-!tmatc r!'! / mar't r!'! /NonHd*r!a?$ r!'!

2. Un!-!tmatc r!'! / 0rmH!#ccr!'! / D*r!a?$ r!'!

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• S-!tmatc r!'! ar! o)t o mar't actor!

• Im#ortant mar't r!' actor!F @)rcha!n#o7r r!', Intr!t rat r!', E"chan rat

r!', Economc ro7th rat• Th m#act o !-!tmatc r!' actor! cannot

? $mnatd ?- ho$dn a d*r!d#orto$o o a!!t!

• Th r!'n!! o a!!t! a! #art o ad*r!d #orto$o o a!!t! ! dtrmnd?- thr !n!t*t- to !-!tmatc r!'

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• Un!-!tmatc r!'! do not ar! o)t omar't actor! th- ar! o)t o a!!tH!#cc or rm !#cc actor!

•Im#ortant rm !#cc actor!F O#ratnr!', 0nanca$ r!', othr rmH!#ccactor!

• Im#act o )n!-!tmatc r!' actor! can ?$mnatd ?- ho$dn a d*r!d#orto$o o a!!t! > )n!-!tmatc r!'! o*aro)! a!!t! co)ntract ach othr

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. Con!)nc! o R!' &

Im#$caton!

Con!)nc! o R!'F R!'! acd ?- anntt- 7o)$d act on or mor o tho$$o7nF

• A!!t!• La?$t!

• R*n)!

•E"#n!!

o7(

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. Con!)nc! o R!' &

Im#$caton!

• I th ntt- ! m#actd ?- *nt r!'!thn ach o th a?o* tm! 7o)$d ?ad*r!$- actd

•I th ntt- ! m#actd ?- contn)o)!r!'! thn ach o th a?o* tm! 7o)$d? thr ad*r!$- or a*o)ra?$- actd

• An ntt- ac! ?oth t-#! o r!'! and

m)!t ado#t !trat! to mana ?oth >th !am !trat- 7ont 7or' or ?otht-#!

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. Con!)nc! o R!' &

Im#$caton!

• Ad*r! m#act on a!!t! 7o)$d dcra! thr*a$)

• Ad*r! m#act on $a?$t! 7o)$d ncra!

thr *a$)• Ad*r! m#act on r*n)! 7o)$d dcra!

thm

•

Ad*r! m#act on "#n!! 7o)$d ncra!thm

• 0a*o)ra?$ m#act 7o)$d ha* o##o!t ct!

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. Con!)nc! o R!' &

Im#$caton!

• Nt ct o a$$ ad*r! & a*o)ra?$m#act! on a$$ a!!t!, $a?$t!, r*n)! &"#n!! 7o)$d ? on !harho$dr 7a$th

• R!' manamnt !trat- o a rm !ho)$d? a?$ to co)ntract a$$ ct! > ad*r! &a*o)ra?$, !)ch that thr ! no m#act on

!harho$dr 7a$th• :aro)! r!' manamnt too$! ar a*a$a?$

or manan *aro)! t-#! o r!'!

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4. 0)rthr Rc$a!!caton oR!'

• R!'! n th cont"t o ?)!n!!ntt! can ? )rthr c$a!!d ntoF

A. Crdt r!'

=. Mar't r!'

C. O#ratona$ r!'

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4AF Crdt R!'

• It a##$! to a$$ ?)!n!! ntt! toth "tnt thdo ?)!n!! on crdt

• nc th! r!' 7$$ nc!!ar$- act?an'!, 0I! & N=0C!

• It ! a$!o a##$ca?$ to co!. n othrnd)!tr! a! 7$$ that do ?)!n!! on

crdt

• To th "tnt co!. ac th! r!' thr! #otnta$ $o!! o ca#ta$

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4AF Crdt R!'

•

A!!!!mnt o #rotF A! a con!r*at*a##roach to a!!!!mnt o #rot! co!.!ho)$d #ro*d or !)ch $o!!! d) toda)$t ?or arr*n at a *a$) o #rot

• @rcn o crdtF 0)rthr a!!!!mnt ocrdt r!' ! m#ortant rom a ?)!n!!#r!#ct* or =0S co!. ?ca)! th

crdtH?a!d #rod)ct! o !)ch co!. can ?a##ro#rat$- #rcd atr ncor#oratnad)at r!' #rm)m n th ntr!t rat

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4=F Mar't R!'

• Mar't r!' rr! to th m#act oactor! r$atd to mar't andconom-

• E. In;aton, ntr!t rat!, "chanrat!, #rc! o $!td !toc'!,commodt- #rc!, nr- #rc!

• S)ch actor! 7o)$d actF r*n)!,"#n!!, #rot! & mar't *a$) oth rm

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4=F Mar't R!'

• To th "tnt th co. ho$d! !c)rt! ordr*at* #rod)ct! a! n*!tmnt! t !"#o!d to th r!' o ca#ta$ $o!!! on !)ch

n*!tmnt!• Th! n t)rn 7o)$d man ro!on o ca#ta$ and

ha! to ? #ro*dd or

• Tho)h th mar't r!' actor! ar

htrono)! n nat)r th- a$$ ornatthr n th mar't or th conom- at $ar &act a$$ rm! > no rm can !ca# th m#act

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4CF O#ratona$ R!'

• A *r- htrono)! cator-

• A$$ r!'! 7hch cannot ? c$a!!d )ndrth #r*o)! t7o cator!, a$$ n th!

• R!' actor! nc$)dF #roc!!!, h)manrror!, ra)d!, !a?ota, r#)tatona$ r!'

• Som o th actor! ar ntrna$ & !om

"trna$• Th actor! do not ha* a common orn

• Mo!t cha$$nn to da$ 7th

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6. %h- Sho)$d % ManaR!'(

• R!' ha! to ? manad n ordr to #rotctth "!tnc o th ntt- )ndr *aro)!crc)m!tanc!

•

Th ntt- m)!t "!t )ndr th m#act o a$$r!' actor! and m)!t ? a?$ to ro7 ntrm! o *a$)

• R!'! can aan ? d*dd nto t7o ro)#!F

a Tho! 7hch ha* *r- $o7 $'$hood oocc)rrnc ?)t *r- hh m#act ? Tho!7hch ha* hh $'$hood ?)t $o7 m#act

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• R!'! n ro)# a ar *nt r!'! andha* to ? #rotctd aan!t

• I not don thr occ)rrnc ma- ?rn

a?o)t th "tncton o th oran!aton• R!'! n ro)# ? ar t-#ca$$-

contn)o)! r!'!

• Not manan !)ch r!'! 7o)$d notr!)$t n th "tncton o thoran!aton

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• =)t not manan r!'! n ? 7o)$d r!)$tn *o$at$t- o r*n)!, "#n!! & #rot!r!)$tn n *o$at$t- o !harho$dr!

7a$th & rt)rn! & hhr co!t o ca#ta$• Manan !)ch r!'! 7o)$d r!)$t n

!ta?$t- o !harho$dr 7a$th & $o7r co!to ca#ta$

• Th! ha! m#$caton! or )rthr nancno th rm

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• Lo7r *o$at$t- o #rot! r!)$t n$o7r co!t o )t- ca#ta$

• Th! a$!o r!)$t! n $o7r co!t o d?tca#ta$ ?ca)! *o$at$t- o #rot!ndcat o#ratn r!' o th co.

• Lo7r co!t o )t- & d?t ca#ta$

na?$! th co. to ncra! t! )t-& d?t ca#ta$ at $o7r co!t

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8. Manamnt o R!'

Manamnt o r!' n*o$*! tho$$o7n ?a!c !t#!F

A. R!' dntcaton

=. R!' ma!)rmnt

C. R!' hdn / mtaton

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8AF R!' Idntcaton

• =or r!' can ? manad t ha! to? dntd > dnt-n th ca)!

• Drnt t-#! o r!' ha* drntcharactr!tc! > hnc th- ha* to? da$t 7th n drnt 7a-!

• Idnt-n th r!' h$#! n

dnt-n th ?!t #o!!?$tchn) to mana t

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8=F R!' Ma!)rmnt

• Ma!)rn th r!' n*o$*!F

a Ma!)rn th $'$hood o th r!'

? Ma!)rn th m#act o th r!'

• Can ? don ?oth )anttat*$- &)a$tat*$-

• $#! nF

a @rort!n th r!'!? Ta'n ad)at ma!)r! to mana

r!'!

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8C R ' d /


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8CF R!' dn /Mtaton

• Th! ar too$! & tchn)! that can ?ado#td to co)ntract th m#act o r!'

• Gnra$$- th too$! n*o$* a co!t

• Th rm! ha* to dnt- th too$ & th"tnt o #rotcton *n t! co!t

• Som too$! & tchn)! #rotct th rm romth do7n!d m#act o r!' ?)t #r*nt! t to

"#$ot th ?nca$ m#act too

• Som too$! can or #rotcton rom thdo7n!d m#act a! 7$$ a! na?$ th rm to"#$ot )#!d #otnta$

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19. :a$)n A!!t! Undr In;)nc o

R!'

• Th trm Ba!!t ! a nrc trm

• A!!t can ? nanca$ or nonHnanca$a!!t

• It mht a$!o r#r!nt an ntt- !)cha! a co.

• An ntt- !)ch a! a co. ! $' a

co$$cton o a!!t! & $a?$t! > t can? tratd a! nt a!!t or a nt$a?$t-

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19. :a$)n A!!t!5

%h- to :a$) A!!t!(

• A!!t! ha* to ? ac)rd / d!#o!d

• %h$ ac)rn a!!t! th !!) !F %hat

! th ar #rc to #a- or th a!!t(• %h$ d!#o!n a!!t! th !!) !F %hat

! th ar #rc to rc* or th a!!t(

•

A!!!!n th ar #rc or an a!!t !?oth a )anttat* and !)?


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19. :a$)n A!!t!5

%h- to :a$) A!!t!(...

• Th )anttat* a!#ct nra$$-r$at! to th *a$)aton ram7or'

• Th !)?


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19. :a$)n A!!t!5

%h- to :a$) A!!t!(...• In*!tmnt dc!on! n*o$* ?)-n / !$$n a

nanca$ n*!tmnt

• Cor#orat r!tr)ct)rn n*o$*! n*!tn /

d!n*!tn n a ?)!n!! or M&A

• Ac)rn an a!!t ?- #a-n a hhr #rc thanth ar *a$) 7o)$d d#r!! th rt)rn! rom

th a!!t• D!#o!n an a!!t at a #rc $o7r than th ar

*a$) 7o)$d d#r!! th rt)rn rom th a!!t

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11. R!' Ad


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11AF Th C$a!!ca$ :a$)atonMod$

• DC0 ?a!d mod$

• N)mrator con!!t! o ca!h ;o7!rom a!!t

• Dnomnator con!!t! o th d!co)ntrat

• :a$) o th a!!t ! d#ndnt onth ca!h ;o7! o*r tm & d!co)ntrat or ma'n th ad


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11=F Im#act o R!'

• D) to th m#act o r!' th )t)rca!h ;o7! 7$$ ?com mor do)?t)$)ncrtan

• Th #ro*dr! o ca#ta$ )t- &d?t 7o)$d r)r a hhrcom#n!aton ?ca)! th- ar

ta'n hhr r!'• In thr ca! th *a$) o th a!!t

7o)$d rd)c

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