FNCE20005 Lecture Notes - Lecture 9: Risk Management, Interest Rate Risk, Standard Deviation
Document Summary
What is corporate risk: the exposure of a company"s earnings, cash ows or market value to uncertain external factors or events. What is risk: dictionary de nition: to expose to hazard or danger , in finance: risk = uncertainty = di erent from what expected, often measured as standard deviation of outcomes. Variance : variance is total risk, risk management tries to reduce the uncertainty associated with future outcomes, ideally, it removes bad outcomes without a ecting good outcomes. E. g. interest rate, exchange rate, commodity price risks. Can be managed using nancial derivatives or other nancial contracts: commercial (or operational) risks. Inherent in the operations of the rm. Generally subject, to a certain extent, to management"s control or in uence. Failures of internal processes and unanticipated actions by competitors. Cannot be managed with derivatives or other kinds of nancial contracts: external event risks. Stem from non-market events such as natural catastrophes or changes in tax or regulatory policies.
