INSEAD MBA Programme

MANAGING RISKS Instructor: Ayse Önçüler Office: CII 0.03 Ext: 4511 E-mail: ayse.onculer@insead.edu Course Description Managing risks has become a key challenge facing today’s managers in business settings. This course is designed to explore effective risk management tools for different kinds of business risks. The course consists of three parts: In the first part, we will talk about identifying and evaluating risks. Various techniques will be discussed, including decision analysis, fault trees and simulation. In the second part of the course, we will introduce some concepts in risk management, including risk communication, negotiations, insurance and the role of financial markets for effective risk management. The third part of the course will focus on different types of business risks, namely financial risk, strategic risk, operational risk, management risk and political risk. Several real-world examples, case studies and simulations will be used throughout the course to illustrate different applications. Who should take the course? The course is intended for those students who want to learn more about different types of business risks and alternative ways to manage these risks. It is particularly suitable for those interested in obtaining an overview of different tools for risk management, without getting into too much technical detail. Course Requirements The grades will be based on class participation, two individual case write-ups, a case presentation and a final project. A breakdown of grading is given below: Case Presentation (group) 20% Case Write-Up (individual) 20% Class Participation 20% Final Project (group) 40%

Case Presentation (group) There will be several case studies related to the topics discussed in class. A set of questions will be provided for these cases. For each case analysis, one or two groups will be expected to lead the discussion in class. Each student will participate in one case presentation. No written report is required. Case Write-Up (individual) Apart from a case presentation as a group, each participant will choose two other cases and turn in an individual report (no more than 3 pages long). The report will be based on the case questions provided beforehand. Class Participation (individual) The class sessions will involve a mix of lectures and case discussions. Students are expected to do the pre-assigned readings and to participate in class discussions. Absences and nonparticipation in class discussion will be reflected in the class participation grade. Final Project (group or individual) A final project will enable the participants to apply the concepts learned in the class to a specific problem. The project topic and the methodology is very flexible: You may examine a problem faced by a specific business, review the current risk management practices within an industry, design your own case study, compare the analytical tools with the real-life behavior, etc. A list of previous project topics will be given for guidance. It is more important to be genuinely interested in the project than whether it fits into any particular category. The groups will give a brief oral presentation of their work at the end of the course. Readings There is one required textbook, which is assigned as a background reading: N.N. Taleb, Fooled by Randomness (Texere, 2001) We will not directly discuss the material in the book during our lectures. Rather, it is assigned as a text that gives a good background for the material we will cover in class. It is an easy reading and provides some interesting examples on the role of uncertainty and risk in business settings. The required readings for the course are provided in the coursepack.

SCHEDULE OF CLASSES PART I: RISK ASSESSMENT Session 1 Defining Risk Read: “Risk Role Grows to Enterprise Scale”, G. Dickinson, 2001. “Back to Basics: Risk Management”, Peter Hunt, 2000. “Preparing Managers for Stormy Weather”, International

Herald Tribune, May 2002. Session 2 Quantifying Risk Read: “A Little Probability Theory”, R. Clemen, 1996.

“Why Both Bulls and Bears Can Act So Bird-Brained”, J. Fuerbringer, New York Times, 1997.

“Pitfalls: Heuristics and Biases”, R. Clemen, 1996. “New Computer Tools Apply Numbers to Risk”, Herald

Tribune, 2003. Session 3 Evaluating Risk I Read: “Decision Analysis”, B. Jackson, 1974.

“Tooling up for Risk Decisions” by K. Vlahos, 2000. Session 4 Evaluating Risk II Read: “Decision Analysis Comes of Age”, Ulvila and Brown, 1982. “Disciplined Decisions”, M. Amram and N. Kulatilaka, 1999. Case #1: “Mike’s Self-Service” Session 5 Evaluation Risk III Read: “Simulation as a Decision Aid”, 1997. Software: Crystal Ball Assignment: Piedmont Airlines (no written report required)

PART II: RISK MANAGEMENT Session 6 Risk Communication Read: “Rx for Risk Communication”, S.D. Perry, Civil Engineering,

1996.

“Analyzing the Daily Risks of Life”, R. Wilson, Technology Review, 1979.

Case #2: “In the Valley of the Shadow: Responsible-Case and Worst-Case Scenarios in the Kanawha Valley, Virginia”

Presentation: Videotape related to the case Session 7 The Role of Insurance in Risk Management Read: “Nature of Insurance”, Pritchett et al, 1996. “Unprofitable Policies”, The Economist, August 2001. “A Fine Romance”, The Economist, March 2001. Case #3: Bentz-Smith Case Session 8 The Role of Financial Markets in Risk Management Read: “Converging Markets & Integrated Solutions”, P. Shimpi, 2001.

“Special Interests”, Erisk OWC, April 2001. Case #4: “Mid Ocean Limited- Trading Catastrophic Index Options” Hand-in: Project Proposal ( max. 1 page outline) PART III: BUSINESS RISKS Session 9 Operational Risk Read: “Managing Risk Before It Manages You”, K.J. Crocker, 2000.

“Managing Operational Risk”, Crouhy et al, 2000. Case #5: “Environmental Risk Management at Chevron Corporation”

Session 10 Financial Risk Read: “The Quest for Precision through VaR”, Glasserman, 2000.

“Hedging Credit Risk”, Crouhy et al, 2000. Case #6: “Risk Management at Apache” Session 11 Management Risk Guest Speaker (to be announced) Session 12 Strategic Risk Read: “A Note on Identifying Strategic Risk” by R.L. Simons, 1998.

“Gauging the Power Play in the New Economy”,Clemmons, 2000.

Case #7: “Hamilton Financial Investments: A Franchise Built on Trust” Session 13 Corporate Risk Management Read: “ERM for Financial Institutions”, S. Rouyer “Enterprise-wide Risk Management and The Role of the Chief

Risk Officer”, J. Lam Case #8: “Honeywell Inc. and Integrated Risk Management” Session 14 Political Risk Read: “Note on Political Risk Analysis”, Deringer & Wang, 1997

“Risky Returns”, The Economist, May 20, 2000. In-Class Exercise: Delphi Method Case#9: “Financing the Mozal Project” Session 15&16 Summary of the Course and Class Presentations Read: “Prospects and Challenges” D. Durbin, 2001. “Ten to Watch in 2003”, Editorial, erisk.com.