FIN 401 Chapter Notes - Chapter 24: Normal-Form Game, Credit Risk, Rise Today
24 Mar 2016
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*omit 24. 5 & hedging interest rate risk in 24. 6* Enterprise risk management (erm): the process of idenifying and assessing risks and, where inancially sensible, seeking to miigate potenial damage. It is important to prioriize and idenify risks that have the greatest potenial for economic and social harm. Insurance is the most widely used risk-management tool: generally used to protect against hazard risks. Whether to purchase insurance is, in principle, a straighforward npv quesion: the insurance premium is the cost, the beneit is the pv of the expected payout by the insurance company to the irm. Hedging/immunizaion: reducing a irm"s exposure to price or rate luctuaions. Derivaive securiies: a inancial asset that represents a claim to another inancial asset: ie: a stock opion gives the owner the right to buy or sell stock (a inancial asset), so stock opions are derivaive securiies. Financial engineering: involves creaing new derivaive securiies, or else combining exising derivaives to accomplish speciic hedging goals.
