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Flashcards in RISK Management Deck (12)
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Risk Control

  • W'keitsverteilung Kontrollieren 
    • Risikovermeidung
    • Schadensverhüttung 
    • Schadensreduktion Maßnahme 



Risk Financing

  • Maßnhame aus dem Finanzsektor, nach dem ein Schaden eingetreten ist die Finazielle Lücke zu schließen
    • Klassische Versicherung
    • Hedging 
  • Risk transfer decisions 


Irrelevance of risk transfers (MM)

Risk transfer = financial decision = ZERO NPV

  • Risk reduction per se is not a reasonable aim if investors are well diversified and can take risk-reduction measures themselves 



Relevance of risk transfers

1. Taxes

  • Reducing the volatility of operating profits reduces the expected tax payments 

2. Debt Overhang Problem

  • Ex ante financing of losses: insurance/hedging 
    • reduces probability of debt overhang or financial distress 
    • allows higher leverage to exploit tax shield 

3. Costly external finance

  • Insurance&Risk managment reduces the need to finance investmens externally 



Insurance & Moral Hazard

  • An insurance policy that compensates for a loss reduces incentives to avoid the loss 
  • Insurance that compensates for "missing funds" creates incentives to always claim that investment opportunites are great and funds insufficient 

Vgl. Derivatives: Information and incentive problems are los 


Systematisches Risiko

  • Terrorism 
  • Hurricanes
  • Earthquakes.,,, 

May be correlated with the market portfoli as the occurrence of the event may have a negative impact on the market 

  • Cannot be fully DIVERSIFIED in the market 
  • Cost of Capital rL will include a risk premium


Negative Beta Asset

  • pays off in bad times 
  • Insurance for non-diversifiable hazards 


rL risk adjusted rate 

  • rL < rf
  • leading to a higher insurance premium 
  • Versicherungsunternehmen verdient ein erwarteten return rL < r


Value of Insurance 

  • perfect capital market: no benefit to the firm from any financial transactions including insurance


  • Value comes from imperfections of capital market: 
    • Cost of financial distress & Debt overhang 
    • Costly External Capital reduction: 
      • Insurance provides cash to firm to offset losses 
      • reduces need for expensive external capital


Market Imperfections

  • raise the cost of insurance above the fair price
    • taxes, transaction cost 
    • Information Risk
      • Firm may be better informed 
    • Moral Hazard:
      • purchasing insurance reduces the firms desire to avoid risk 
      • the firm may exaggerate risk 
  • Perfomance risk
    • Versicherung kann nicht zahlen
  • Basis risk
    • if insurance contract may not completey cover the loss 


Addressing Market Imperfection

1. Selbstbehalt (Deductible) 

  • Insurance policy only coers losses in excess of the deductible 
  • losses up to the deductilbe are borne by the policyholder

--> Reduces Transaction Cost (taxes,..) 

2. Obergrenze (Policy Limit):

  • Only covers losses up to the policy limit



Options, Future, Swaps 

  • Hedging Instruments for commodity price risk 
    • as well as interest rate and exchange rate risks
  • Derivatives cover the price risk, but not the quantity risk 



  • Long Put + Short Call
  • Self Financing 
  • High flexibillity