MANAGING

FINANCIAL
RISK

MARMELO V. ABANTE
Presenter

negosentro.com
 2 10/21/2019

Financial
investing
Common way
businesses and
individuals generate
passive income
streams.
 3 10/21/2019

• It can be done through

a wide variety of
Investing investment instruments.
Money Stocks, bonds,
derivatives, mutual
funds, money markets
and other items are just
a few types of available
investments
 4 10/21/2019

Five (5) Ways 1.Diversify

2.Use Savings Account
to Manage 3.Invest Sooner Than
Financial Risk Later
4.Learn About
Investments
5.Be Savvy, Not Greedy
 5 10/21/2019

• It is a simple tool, yet so

Stop-loss many investors fail to
order use it. Whether to
prevent excessive
losses or to lock in
profits, nearly all
investing styles can
benefit from this trade.
 6 10/21/2019

1.Careful and
Rules needed continuous tracking of
in stop-loss market prices of
limit existing positions
 7 10/21/2019

2. Sensible choices of
Rules needed limit size relative to
in stop-loss trader expertise and
limit trading strategy
 8 10/21/2019

3. Good procedures
Rules needed for review of request to
in stop-loss exceed limits
limit
 9 10/21/2019

4. Analysis of reasons
Rules needed for large losses and
in stop-loss large gains
limit
 10 10/21/2019

Rules needed 5. Financing plans

in stop-loss
limit
 11 10/21/2019

Recommenda 1.Marking to Market

2.Market Valuation
tions Relating
Methods
to the 3.Identifying Revenue
Measurement Sources
of Trading Risk 4.Measuring Market Risk
5.Stress Simulations
6.Investing and Funding
Forecasts
 12 10/21/2019

1.Recognition of the
7 Key non-normal distribution
Principles of financial variables.
2.The need for simulation
3. The need to consider
subjective probabilities
as well as objective
frequencies
 13 10/21/2019

7 Key 4. The distinction

between diversifiable
Principles and non-diversifiable risk
5. The use of arbitrage
theory to decompose
risk
6. The need to consider
periods of reduced
liquidity
 14 10/21/2019

7 Key 7. The need to

Principles distinguished degrees of
illiquidity with different
tools to handle each
type
 15 10/21/2019

It is the risk that a company or

Liquidity bank may be unable to meet
short term financial demands.
Risk
This usually occurs due to the
inability to convert a security
or hard asset to cash without
loss of capital and/or income
in the process.
 16 10/21/2019

It describes an asset or
Illiquidity security that cannot be
sold quickly due to a
Risk
shortage of interested
buyers or lack of an
established trading market
 17 10/21/2019

It cannot be easily
Illiquidity
converted into cash
Asset without potential for losing
a significant percentage
of their value
 18 10/21/2019

Recommenda 1.Marking to Market

2.Market Valuation
tions Relating
Methods
to the 3.Identifying Revenue
Measurement Sources
of Trading Risk 4.Measuring Market Risk
5.Stress Simulations
6.Investing and Funding
Forecasts
 19 10/21/2019

1.Set up a liquid proxy

that allows the total risk
to be split into liquid
risk and illiquid risk.
2.Use the liquid proxy in
all standard risk reports
and limits
We can Utilize 3.Use a separate
financial risk simulation to manage
management the risk of the
mismatch
through:
 20 10/21/2019

• The value of an
asset based on
the price that
would be paid for
it if it were sold at
a certain time.
Market
Valuation
 21 10/21/2019

1.You may able to get

model-based quotes
from several sources
with the hope that
errors will average out
2.The external models are
being tested by the use
Advantages in of the quotes by many
using model- different firms, so it is
more likely that
based objections will be raised
external quote if the model is missing
something.
 22 10/21/2019

3. It is less likely that

traders will influence the
outcome when an
external source is being
used.
4. The quotes may
become so widely used
Advantages in as to be a good indicator
using model- of where the market is
trading
based
external quote
 23 10/21/2019

5. The primary
disadvantage to using a
model-based external
quote is that you may not
be able to obtain details
of the mode used, so it is
harder to estimate
Advantages in potential error and build
using model- adequate reserves for
uncertainty that when
based using your own model
external quote
 24 10/21/2019

When quotes are not

available on regularly
displayed screens or
reports, firms seeking
quotes may need to
make specific inquiries to
obtain quotes.
Revealing
positions
 25 10/21/2019

It is a market for a security

in which market makers
only quote either the bid
or the ask price. This
happens when the entire
One-way market is moving strongly
in a certain direction,
markets / with little resistance.
one-sided
market
 26 10/21/2019

• It is a capital required
to be set aside to
cover a company
against unexpected
debt.
• It serves as backup for
equity and credit
losses.
• A reserve will have
Valuation capital gains or losses
Reserve credited or debited
against the reserve
account.
 27 10/21/2019

• It’s a deliberate,
detailed and well-
researched report that
indicates revenue for
all activities in a
company.
• This can range from
sale(product and
services), costs,
Analysis of income, and other
Revenue variables.
 28 10/21/2019

• Standard shifts such as

1 basis point interest
rate move, a 1percent
stock price move, or a
1 percent implied
volatility move
• Shifts based on the
statistical analysis of
the probability of the
Three Primary size of the change
types of shifts:
 29 10/21/2019

• Shifts based on
scenarios determined
by economic insight
into the potential size
of different shifts and
the relation between
them.

Three Primary
types of shifts:
 30 10/21/2019

• To buy or sell short; that

is to own or to owe
some amount on an
asset or derivative
security
• When you are
negotiating, you will
need to take a position
and be prepared to
stick to it
Position Taking
 31 10/21/2019

• It is the set of methods

by which firms
evaluate potential
losses and take action
to reduce or eliminate
such threats
• It helps companies limit
lost assets and income
Risk control • It is a key component
of a company’s
enterprise risk
management protocol
 32 10/21/2019

• Accept risk – the

stakeholders who are
responsible for a risk
can choose to accept
risk.
• Mitigate Risk – actions
are taken to reduce
How to control risk to an acceptable
Risk level
 33 10/21/2019

• Eliminate risk – a risk

may be reduced to
zero. Normally the only
way to accomplish this
is to cease the activity
that generates the risk.
• Transfer risk – a risk may
How to control be transferred to
Risk another organization
or individual
 34 10/21/2019

• Financial risk management is the practice of

economic value in a firm by using financial
instruments to manage exposure
to risk: operational risk, credit risk and market
risk, foreign exchange risk, shape
risk, volatility risk, liquidity risk, inflation
risk, business risk, legal risk, reputational risk,
sector risk etc. Similar to general risk
management, financial risk management
requires identifying its sources, measuring it,
and plans to address them.
• Financial risk management can be
qualitative and quantitative. As a
SUMMARY specialization of risk management, financial
risk management focuses on when and how
to hedge using financial instruments to
manage costly exposures to risk
 35 10/21/2019

• Finance theory (i.e., financial economics)

prescribes that a firm should take on a project if
it increases shareholder value. Finance theory
also shows that firm managers cannot create
value for shareholders, also called its investors,
by taking on projects that shareholders could
do for themselves at the same cost.[5]
• When applied to financial risk management, this
implies that firm managers should not hedge
risks that investors can hedge for themselves at
the same cost. This notion was captured by the
so-called "hedging irrelevance proposition":[6] In
a perfect market, the firm cannot create value
SUMMARY by hedging a risk when the price of bearing
that risk within the firm is the same as
the price of bearing it outside of the firm. In
practice, financial markets are not likely to be
perfect markets
 36 10/21/2019

• This suggests that firm managers likely have

many opportunities to create value for
shareholders using financial risk management,
wherein they have to determine which risks are
cheaper for the firm to manage than the
shareholders. Market risks that result in unique
risks for the firm are commonly the best
candidates for financial risk management.[11]
• The concepts of financial risk management
change dramatically in the international
realm. Multinational Corporations are faced
with many different obstacles in overcoming
these challenges. There has been some
SUMMARY research on the risks firms must consider when
operating in many countries, such as the three
kinds of foreign exchange exposure for various
future time horizons: transactions
exposure,[12] accounting exposure,[13] and
economic exposure.[
 37 10/21/2019

1. Peter F. Christoffersen (22 November 2011).

Elements of Financial Risk Management.
Academic Press. ISBN 978-0-12-374448-7.
2. Allan M. Malz (13 September 2011). Financial Risk
Management: Models, History, and Institutions.
John Wiley & Sons. ISBN 978-1-118-02291-7.
3. Van Deventer, Donald R., and Kenji Imai. Credit
risk models and the Basel Accords. Singapore:
John Wiley & Sons (Asia), 2003.
4. Drumond, Ines. "Bank capital requirements,
business cycle fluctuations and the Basel Accords:
REFEREN a synthesis." Journal of Economic Surveys 23.5
(2009): 798-830.
CES:
 38 10/21/2019

5. EMMANUEL ATTAH KUMAH. COST OF CAPITAL (A

FINANCIAL TOOL TO CREATE AND MAXIMIZE
SHAREHOLDER VALUE). Lulu.com. pp. 39–. ISBN 978-
1-304-26045-1.
6. KRISHNAMURTI CHANDRASEKHAR; Krishnamurti &
Viswanath (eds.) "; Vishwanath S. R. (2010-01-30).
Advanced Corporate Finance. PHI Learning Pvt.
Ltd. pp. 178–. ISBN 978-81-203-3611-7.
7. John J. Hampton (1982). Modern Financial
Theory: Perfect and Imperfect Markets. Reston
Publishing Company. ISBN 978-0-8359-4553-0.
REFEREN 8. Zahirul Hoque (2005). Handbook of Cost and
Management Accounting. Spiramus Press Ltd. pp.
CES: 201–. ISBN 978-1-904905-01-1.
 39 10/21/2019

9. Kirt C. Butler (28 August 2012). Multinational

Finance: Evaluating Opportunities, Costs, and Risks
of Operations. John Wiley & Sons. pp. 37–. ISBN 978-
1-118-28276-2.
10. Dietmar Franzen (6 December 2012). Design of
Master Agreements for OTC Derivatives. Springer
Science & Business Media. pp. 7–. ISBN 978-3-642-
56932-6.
11. Corporate Finance: Part I. Bookboon. pp. 32–.
ISBN 978-87-7681-568-4.
http://www.emeraldinsight.com/Insight/viewConte
REFEREN ntItem.do;jsessionid=EFA8D4FB63329F2C94F482796
46551BF?contentType=Article&contentId=1649008
CES: (contrary to conventional wisdom it may be
rational to hedge translation exposure. Empirical
evidence of agency costs and the managerial
tendency to report higher levels of translated
income, based on the early adoption of Financial
Accounting Standard No. 52).
 40 10/21/2019

12. Aggarwal, Raj, "The Translation Problem in

International Accounting: Insights for Financial
Management." Management International Review
15 (Nos. 2-3, 1975): 67-79. (Proposed accounting
framework for evaluating and developing
translation procedures for multinational
corporations).
13.
http://www.iijournals.com/doi/abs/10.3905/jpm.19
97.409611 (Discusses the benefits for hedging in
foreign currencies for MNCs).
REFEREN SEC(Securities and Exchange Commission),
https://www.sec.gov/comments/s7-16-15/s71615-
CES: 33.pdf
The Global Association of Risk Professionals,
http://garp.org/#!/frm/
Linkedin,
 41 10/21/2019

14. https://www.linkedin.com/company/global-
association-of-risk-professionals
Official Candidate Guide,
http://storage.pardot.com/39542/121486/FRM_201
7_CandidateGuide_V8.2_AG.pdf
GARP Frequently-Asked-Questions -EXAM
regulations-, 15.
http://www.garp.org/#!/frm/frequently-asked-
questions
Wallstreetmojo official FRM salary, 15.
http://www.wallstreetmojo.com/frm-salary/
REFEREN Chen, Liyan. "2015 Global 2000: The World's Largest
Banks", Forbes Magazine. 16.
CES: https://www.forbes.com/sites/liyanchen/2015/05/0
6/2015-global-2000-the-worlds-largest-banks/
The Benefits of Professional Certification, William
May William May Senior Vice President,
 42 10/21/2019

18.
http://www.iactglobal.in/images/FRM_Companies.
pdf
2012 Financial RiskManager Roadshow,
http://sem.tongji.edu.cn/semen_data/attachment
s/month_1206/201265155126.pdf
GARP Buy Side Risk Managers Forum – Risk
Principles for Asset Managers(2015.6.11)
http://www.ermsymposium.org/2015/presentations
/C-19.pdf

REFEREN
CES:
43 10/21/2019
44 10/21/2019