Posts Tagged ‘risk management’

Risk Management: Flawed Fantasy Or Achievable Challenge?

Thursday, June 26th, 2014

By Brendan Hogan, a Masters of Applied Finance student

Lights are flashing. The screams of children are echoing off the walls. The cabin has become an ecosystem of fear and trepidation. There has been no word from the cockpit in over 20 minutes and the rattling of the Rolls-Royce engines mimic the velocity of an earthquake. A flight stewardess appears from the galley and assures the passengers everything is going to be alright. She asks everyone to put their life vests on as a precaution: “standard procedure,” she says. (more…)

Wall Street, The Love (Hate) Affair With Credit Default Swaps, And The Case Of The Misguided Model

Monday, August 5th, 2013

By Martin Kidd

Martin Kidd is Managing Director of Embiggen Finance and is completing a Master of Business (Applied Finance) at Queensland University of Technology

Imagine yourself sitting at a dinner party, where everybody has interesting anecdotes and now it’s your turn to tell a story. You’re a derivatives trader, and you know that if you start talking about work, everyone’s eyes will glaze over because there is approximately zero genuine interest in whatever it is you actually do for a living. Unless you’ve allegedly played a part in the 2007 credit crisis, that is. Credit default swaps have had a bit of a hard time in the finance media since the peak of the financial crisis, so perhaps it’s about time we explored the journey they’ve had since conception through to what’s happening in the market today.

(more…)

One Job Too Many (?)

Tuesday, June 25th, 2013

by Jenna Moore, a current Bachelor of Business (Honours) student.

The recent and unexpected $6B trading loss sustained by JPMorgan Chase & Co fuelled the debate centered on CEO duality. CEO duality refers to the situation where the CEO also holds the position of the Chairman of the board. With increasing public awareness and academic interest in corporate strategic leadership, two key questions resound in both corporate finance research and social debate at large: Should the CEO and Chairman roles be separated? Should a separation be mandatory?

(more…)

When Ignorance is Not Bliss … Just Risky

Tuesday, June 11th, 2013

By Emily Tooker, Student of Master of Business (Applied Finance)

In the popular 1983 comedic film, Trading Places, commodities broker, Louis Winthorpe III, and rags-to-riches profiteer, Billy Ray Valentine, bet their life savings on the frozen orange juice market to accomplish a lucrative trade in a single master stroke.

At the end of the film, we are treated to Winthorpe and Valentine basking on a tropical island, and the token yacht decorating an expanse of blue ocean in the background.

Real or imagined accounts of overnight monetary success, such as that depicted in Trading Places, have given us the false impression that risk will give its due reward. Likewise, basic finance theory tells us that there is a risk-return trade off – to obtain a higher return, you must be willing to take on more risk – and this theory has driven a risk-seeking culture in finance.

(more…)

When all you have is a hammer; Why financial managers are so bad at measuring risk

Monday, May 20th, 2013

By Robin (Mac) Stark

When a carpenter sets to work, tools in hand, he is prepared. The house he goes to work on, he is all too familiar with, and, thanks to physics and engineering, he can replicate, time after time, the same solid and reliable structure. Alas – this is not so for the contemporary Financial manager. Yet, there is a belief that a risk analyst can go to her trade, tools in hand, with the same accuracy and reliability of the carpenter. But this is her first mistake, a hammer is a reliable tool derived from the predictability of physics – the carpenter can make use of a simple and reliable hammer because with certainty, the force of the last strike of the hammer will be the same as the next. However, for the risk manager, such an assumption can prove costly, because the game is not the same – finance is not physics, a hammer just won’t do.

(more…)

Eyes wide shut: Are finance managers looking but don’t see?

Tuesday, October 9th, 2012

By Shane Murray

In the wake of poor returns or worse, substantial loss of wealth, Financial Managers wear the blame. Like a phoenix born from the ashes of ruin, the angry mob emerges and sprays charge at the financial sector, labelling their behaviour as reckless, their knowledge of financial markets absent and their understanding of risk as infantile. In my opinion this is a justified resolve as from inception, Financial Managers have been monitoring risk with their eyes wide shut. The inherent flaws of contemporary risk models used by Financial Institutions are well known, as too are the means of manipulating portfolios to accumulate risk not captured by their estimates. Such behaviour is reckless and wholly undermines why risk is quantified in the first place. But what choice do Traders have? Year after year shareholders demand bigger and better returns and Financial Managers find themselves in a precarious situation. Should they be reducing the exposures when the mutters of disaster begin to surface, or do they turn a blind eye and rely on their risk metrics as an appropriate scapegoat? After all, taking the safer approach, reducing risk and yielding a lesser return spell certain crucifixion at the hands of the same angry mob. So it seems the problem is twofold. Thankfully, with so much on the line, a collaborative approach to risk supervision is emerging through the Basel accords which aim to dispel such irresponsible behaviour. Unfortunately such endeavours are yet to curb the insatiable desires of the mob, which Financial Managers seem more than willing to oblige.

(more…)

Credit risk: what we know, what we don’t know and what we should know

Thursday, August 30th, 2012

By Mei Lin KER

With the deregulation of the financial markets, companies have progressed from traditional method of bank borrowing to the issuance of corporate bonds to seek capital from the general public. As a potential lender, how will you assess which company is a safer haven to park your money? Is there a way to allow you to gauge the default risk of each company so that you can make an informed choice? One of the solutions lies in credit rating agencies. The use of ratings is pervasive in today’s society. From movies to restaurants to even car safety, ratings are compiled to provide consumers a quick assessment and comparison of the desirability of the product or service. In the financial industry, credit risk ratings for corporate and sovereign debt instruments are provided by credit rating agencies (CRAs) with the current industry leaders being Moody’s, Standard & Poor’s (S&P), and Fitch.

The probe by the US Congress Committee uncovered the credit rating agencies as one of the main culprits fuelling the GFC calamity. Their failure in providing correct ratings to certain complex financial products led to the severity of the financial meltdown. Under Basel II, banks utilising the standardised approach to determine their regulatory capital are required to use external credit assessments to determine the weightings for calculation of the total risk-weighted assets. Elevated to the status of “nationally recognised statistical rating organisations” (NRSROs), Moody’s, S&P and Fitch provide such external credit statistics. Though more rating agencies have been added to the list as the years passed, the Big Three maintain their dominant positions, collectively representing 95% of the market. What do we actually know about such agencies to trust their competency in providing accurate and unbiased ratings? Let’s explore further.

(more…)

Making Sense of Nonsense: Enhancing Corporate Governance Through Compliance

Friday, July 20th, 2012

by Peita Lin

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” — Adam Smith

While not the first to make such an assertion, much of modern capitalism works under the assumption that the inherent vices that drive human behaviour, namely self-interest and the inordinate accumulation of wealth are thought to be in aggregate beneficial for society. As a certain fictional investor once so eloquently remarked ‘greed, for a lack of better word, is good’.

We’re all utility maximisers and corporate executives, as the fittest specimens of this criterion, serve to remind the rest of us why we’re not making seven digit salaries. The greedy tendencies that drives and motivates their success are often at times to the detriment of others; and therein lies the fundamental problem underpinning much of corporate governance. We expect them, the executives and managers, to act ruthlessly in competition but fairly in the allocation of accrued benefits to us, the faceless shareholders. The technical term is ‘agency conflict’ and a great deal of time has been spent detailing and proposing solutions to this problem with varying degrees of success. A quick definition for the uninformed: the separation between ownership and control in an incorporated firm creates tensions between the interests of the principal and agent thereby creating a position of moral hazard.

(more…)

Measuring market risk using historical data: Bogus or not?

Thursday, May 17th, 2012

by Mei Lin Ker

Risk management has become the hottest topic ever in today’s turbulent economic climate. We are now still living in the shadows cast by the U.S. subprime crisis in 2008 which has shaken up the U.S. economy with its powerful negative aftershocks reverberating to the rest of the world. Till now, the U.S. economy is making baby steps in recovering from the economic devastation of the Global Financial Crisis (GFC). As big firms collapsed and mega bailouts ensued, people are asking the fundamental question: Why did this happen? Aren’t companies which use highly sophisticated risk management tools able to foresee the impending downfall and, with the information provided, aren’t their risk managers able to take preemptive measures accordingly? Is there then something wrong with these tools or the risk managers?

(more…)


Privacy | Copyright matters | Accessibility
Contact us | Feedback | Disclaimer
Opinions expressed in this blog are those of the individual contributors only.
QUT Home | Blog Home