Introduction Risk Management
description
Transcript of Introduction Risk Management
![Page 1: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/1.jpg)
Introduction Risk Managment
Finance for Exchange
Witek ten Hove
![Page 2: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/2.jpg)
Introduction Risk Management
Risk and quality Risk analysis Risk reporting Risk and behavior Risk instruments
![Page 3: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/3.jpg)
Risk and quality
Decrease uncertainty for stakeholders: Suppliers of capital (cash flows) Customers (product) Suppliers (sales and payments) Employees (career and reward)
![Page 4: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/4.jpg)
Alea Iacta Est
![Page 5: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/5.jpg)
Probability of loss within one month
Price- {combinations}
2 - {(1,1)} 3 - {(1,2), (2,1)} 4 - {(1,3), (2,2), (3,1)} 5 - {(1,4), (2,3), (3,2), (4,1)} 6 - {(1,5), (2,4), (3,3), (4,2), (5,1)} 7 - {(1,6), (2,5), (3,4), (4,3), (5,2),
(6,1)} 8 - {(2,6), (3,5), (4,4), (5,3), (6,2)} 9 - {(3,6), (4,5), (5,4), (6,3)} 10 - {(4,6), (5,5), (6,4)} 11 - {(5,6), (6,5)} 12 - {(6,6)}
Total: 36 combinations
Source: http://www.futureaccountant.com/theory-of-expectation-random-variable/problems-solutions/throwing-rolling-dice.php
![Page 6: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/6.jpg)
Probability of default within two months
Result- {combinations}
-/- 200 {(1,1)}
-/- 100 {(1,2), (2,1)}
0 {(1,3), (2,2), (3,1)}
100 {(1,4), (2,3), (3,2), (4,1)}
200 {(1,5), (2,4), (3,3), (4,2), (5,1)}
300 {(1,6), (2,5), (3,4), (4,3), (5,2), (6,1)}
400 {(2,6), (3,5), (4,4), (5,3), (6,2)}
500 {(3,6), (4,5), (5,4), (6,3)}
600 {(4,6), (5,5), (6,4)}
700 {(5,6), (6,5)}
800 {(6,6)}
Totaal: 36 combinations
Month 1 Month 2 Total
ResultProbability and Result Probability Result Probability
-200 1/36 default 36/36 -200 1/36
or
-100 1/18 -200 1/36 -300 1/648
-100 1/18 -200 1/324
or
0 1/12 -200 1/36 -200 1/432
Total 3,5%
![Page 7: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/7.jpg)
Probability of default within two months with interest jump
Result- {combinations}
-/- 600 {(1,1)}
-/- 500 {(1,2), (2,1)}
-/- 400 {(1,3), (2,2), (3,1)}
-/- 300 {(1,4), (2,3), (3,2), (4,1)}
-/- 200 {(1,5), (2,4), (3,3), (4,2), (5,1)}
-/- 100 {(1,6), (2,5), (3,4), (4,3), (5,2), (6,1)}
0 {(2,6), (3,5), (4,4), (5,3), (6,2)}
100 {(3,6), (4,5), (5,4), (6,3)}
200 {(4,6), (5,5), (6,4)}
300 {(5,6), (6,5)}
400 {(6,6)}
Totaal: 36 combinations
Month 1 Month 2 TotalResult Probability and Result Probability Result Probability
-600 1/36 1 -600 1/36 or
-500 1/18 1 -500 1/18 or
-400 1/12 1 -400 1/12 or
-300 1/9 1 -300 1/12 or
-200 5/36 1 -200 1/12 Totaal 41,7%
or -100 1/6 -600 1/36 -700 1/216
-500 1/18 -600 1/108 -400 1/12 -500 1/72 -300 1/9 -400 1/54 -200 5/36 -300 5/216 -100 1/6 -200 1/36 or
0 5/36 -600 1/36 -600 5/1296 -500 1/18 -500 5/648 -400 1/12 -400 5/432 -300 1/9 -300 5/324 -200 5/36 -200 25/1296or
100 5/36 -600 1/36 -500 5/1296 -500 1/18 -400 5/648 -400 1/12 -300 5/432 -300 1/9 -200 5/324 or
200 5/36 -600 1/36 -400 5/1296 -500 1/18 -300 5/648 -400 1/12 -200 5/432 or
300 5/36 -600 1/36 -300 5/1296 -500 1/18 -200 5/648 or
400 5/36 -600 1/36 -200 5/1296Total 56,6%
![Page 8: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/8.jpg)
Alea Iacta Est?
![Page 9: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/9.jpg)
Normal distribution
![Page 10: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/10.jpg)
Normal distribution
![Page 11: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/11.jpg)
Project risk
Simple scenario Extended scenario Monte Carlo simulation
![Page 12: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/12.jpg)
Simple scenario analysis
Example: 5 variables / 3 scenarios
Risk analysis ScenarioPrice per unit Negative Expected Positive
Selling price 8,00 10,00 12,00
Cost of raw materials 8,00 6,00 4,00
Cost of energy 2,00 1,50 1,00
Cost of labor 3,00 2,00 1,00
Result (5,00) 0,50 6,00
Units sold 1.000 2.000 3.000
Total result (5.000) 1.000 18.000
![Page 13: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/13.jpg)
Extended scenario analysis
Example: 5 variables / 3 scenarios = 35 = 243 possible results
![Page 14: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/14.jpg)
Monte Carlo Simulation
![Page 15: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/15.jpg)
Known Knowns, Known Unknowns, Unknown Unknowns
![Page 16: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/16.jpg)
Rumsfeld = Einstein
Known Knowns, Known Unknowns, Unknown Unknowns
="Not everything that counts can be counted, and
not everything that can be counted counts." (Sign hanging in Einstein's office at Princeton)
![Page 17: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/17.jpg)
Black Swan events
0%
5%
10%
15%
20%
25%
30%
35%
40%
We
ek
ly g
row
th
Week
Growth Rate of a Christmas Turkey
![Page 18: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/18.jpg)
Risk
Risk = Likelihood x Damage
![Page 19: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/19.jpg)
Risk reporting
Probability classes Damage classes Risk scores Risk matrix
![Page 20: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/20.jpg)
Example
Probability classes
Probability classes
Score Probability (%) Description Qualification
1 10% Less than 1 x per 3 years Very unlikely
2 30% between 1 - 2 x per 3 years Unlikely
3 50% between 2 - 3 x per 3 years Possible
4 70% between 3 - 4 x per 3 years Likely
5 90% More than 4 x per 3 years Very likely
![Page 21: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/21.jpg)
Example
Damage classes
Damage classes
Score Damage Damage Qualification
1 Less than 100.000 EUR < 1% of equity Very low
2 between 100.000 - 400.000 EUR < 4% of equity Low
3 between 400.000 - 800.000 EUR < 8% of equity Serious
4 between 800.000 - 1.500.000 EUR < 15% of equity High
5 More than 1.500.000 EUR > 15% of equity Very high
![Page 22: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/22.jpg)
Example
Risk scores
Event Effect Probability Damage Risk
External
Lower purchasing power Less demand, lower selling prices, higher bad debt levels
1 5 5
Inflation Higher raw material prices, labor costs, energy prices, transportation prices, interest costs
1 4 4
Shortage raw materials Higher raw material prices 2 3 6
Shortage labor Higher labor costs 1 1 1
Logistics interruption No supplies, no distribution 1 5 5
![Page 23: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/23.jpg)
Example Risk matrix
High
Risk
Low R
isk
![Page 24: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/24.jpg)
Risk
When the probability of an event is 100%, is it still risk?
![Page 25: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/25.jpg)
Risico and behavior
After assessing the risks, how do you proceed?
Research Tversky / Kahneman (1979) Own experiment
![Page 26: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/26.jpg)
Survey students period 1 - 2010/11
Situation 1:
100% certainty 3.000 EUR profit
vs
80% certainty of 4.000 and 20% certainty of zero profit
Situation 2:
100% certainty 3.000 EUR loss
vs
80% certainty of 4.000 and 20% certainty of zero loss
![Page 27: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/27.jpg)
Results
![Page 28: Introduction Risk Management](https://reader036.fdocuments.in/reader036/viewer/2022062319/55891901d8b42afe7c8b457d/html5/thumbnails/28.jpg)
Risk instruments
Legal:
Contracts
SLAs
Etc.
Economical:
Financial instruments (derivatives, insurance)
Internal control instruments
Etc.
Management:
Quality systems
HRM instruments: competencies, experience, motivation
Etc.