Reviews on Financial Risk Management Essay Example for Free

Reviews on Financial Risk Management Essay The definition and types of financial risk III. Risk management and the theoretical foundation IV. The process of financial risk management V. The challenges faced by the modern financial risk management theories ?Abstract? Financial risks are exposures of uncertainties for those participants in financial market. Financial risks can be divided into four categories: market risk, credit risk, liquidity risk and operational risk. Risk management has become more and more crucial for a market participant to survive in the highly competitive market. As the development of the global financial market, there are many phenomena that cannot be explained by traditional financial risk management theories. These phenomena have accelerated the development of behavioral finance and economic physics. The financial management theories have already improved a lot over the past decades, but still facing some challenges. Therefore, this report will review some important issues in the financial risk management; introduce some theoretical foundation of financial risk management, and discuss the challenges faced by the modern financial risk management. I. Introduction Financial risk is one of the basic characteristics of financial system and financial activities. And financial risk management has become an important component of the economic and financial system since the occurrence of financial in human society. Over the past few decades, economic globalization spread across the world with the falling down of the Bretton Woods system. Under above background, the financial markets have become even more unstable due to some significant changes. Many events happened during the decades, including the â€Å"Black Monday† of the year 1987, the stock crisis in Japan in 1990, the European monetary crisis in 1992, the financial storm of Asia in 1997, the bankruptcy of Long-Term Capital Management in 1998, and the most recent global financial crisis triggered in the year 2008. All these changes brought enormous destruction of the smooth development of the world economy and the financial market. At the same time, they also helped people realized the necessity and urgency of the financial risk management. Why did the crisis happened and how to avoid the risk as much as possible? These questions have been endowed more significant meaning for the further development of the economy. Therefore, this report will review some important issues in the financial risk management; introduce some theoretical foundation of financial risk management, and discuss the challenges faced by the modern financial risk management. II. The Definition and Types of Financial Risk The word â€Å"risk† itself is neutral, which means we cannot define risk a good thing or bad. Risk is one of the internal features of human behavior, and it comes from the uncertainty of the future results. Therefore, briefly speaking, risk can be defined as the exposure to uncertainty. In the definition of risk, there are two extremely important factors: first is uncertainty. Uncertainty can be considered as the distribution of the possibility of one or more results. To study risk, we need to have a precise description about the possibility of the risk. However, from the point view of a risk manager, the possible result in the future and the characteristic of the possibility distribution are usually unknown, so subjective factors are frequently needed when making decisions. The second factor is the exposure to uncertainty. Different human activities were influenced at different level to the same uncertainty. For example, the future weather is uncertain to everyone, but the influence it has over agriculture can be far deeper than that over finance industry or other industry. Based on the above description about risk, we could have a clearer definition of financial risk. Financial risk is the exposure to uncertainty of the participants in the financial market activities. The participants mainly refer to financial institutions and non-financial institutions, usually not including ndividual investors. Financial risk arises through countless transactions of a financial nature, including sales and purchases, investments and loans, and various other business activities. It can arise as a result of legal transactions, new projects, mergers and acquisitions, debt financing, the energy component of costs, or through the activities of management, stockholders, competitors, foreign governments, or weather. (Karen A. Horcher). Financial risk can be divided into the following types according to the different sources of risk. A. Market risk. Market risk  is the  risk  that the value of a portfolio, either an investment portfolio or a trading portfolio. It will decrease due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices. The influence of these market factors have over the financial participants can be both direct and indirect, like through competitors, suppliers or customers. B. Credit risk. Credit risk  is an investors risk of loss arising from a borrower who does not make payments as promised. Such an event is called a  default. Almost all the financial transactions have credit risk. Recent years, with the development of the internet financial market, the problem of internet finance credit risk also became prominent. C. Liquidity risk. Liquidity risk  is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss. Liquidity risk arises from situations in which a party interested in trading an  asset  cannot do it because nobody in the  market  wants to trade that asset. Liquidity risk becomes particularly important to parties who are about to hold or currently hold an asset, since it affects their ability to trade. D. Operational risk. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Nowadays, the study and management of operational risk is getting more attention. The organizations are trying to perfect their internal control to minimize the possibility of risk. At the same time, the mature theory of other subjects, such as operational research methods, are also introduced to the management of operational risk. Overall, financial risk management is a process to deal with the uncertainty resulting from financial markets. It involves assessing the financial risks facing an organization and developing management strategies consistent with internal priorities and policies. Addressing financial risks proactively may provide an organization with a competitive advantage. It also ensures that management, operational staff, stockholders, and the board of directors are in agreement on key issues. III. Risk Management and the Theoretical Foundation Financial market participant’s attitude towards risk can be basically divided into the following categories. A. Avoid risk. It is irrational for some companies to think that they can avoid the financial risks though their careful management because of the following reasons. First of all, risk is the internal feature of human activities. Even though it doesn’t have direct influence, it could generate indirect influence though the competitors, suppliers or customers. Moreover, sometimes it might be a better choice for the manager of the company to accept risk. For example, when the profit margin of the company is higher than the market profit margin, the manager can increase the value of the company by using financial leverage principle. Obviously, it will be harder to increase the value of a company if the manager is always using the risk avoidance strategy. B. Ignore risk. Some participants tend to ignore the existence of risks in their financial activities, thus they will not take any measures to manage the risk. According to a research of Loderer and Pichler, almost all the Swedish multinational companies ignored the exchange rate risk that they are facing. C. Diversify risk. Many companies and institutions choose to diversify risk by putting eggs into different baskets, which means reaching the purpose of lower risk by holding assets of different type and low correlation. And the cost is relatively low. However, as to small corporations or individuals, diversifying risk is somehow unrealistic. Meanwhile, modern asset portfolio theory also tells us that diversifying risk could only lower the unsystematic risk, but not systematic risk. D. Manage risk. Presently, most people have realized that financial risk cannot be eliminated, but it could get managed though the financial theory and tools. For instance, participants can break down the risk they are exposed to by using financial engineering methods. After keeping some necessary risk, diversify the rest risk to others by using derivatives. But why do we need financial risk management? In other words, what is the theoretical foundation of the existence of financial risk management? The early financial theory argues that financial risk management is not necessary. The Nobel Prize winner Miller ;amp; Modigliani pointed out that in a perfect market, financial measures like hedging cannot influence the firm’s value. Here the perfect market refers to a market without tax or bankruptcy cost, and the market participants own the complete information. Therefore, the managers do not need to worry about financial risk management. The similar theory also says that even though there will be slight moves in the short run, in the long run, the economy will move relatively stable. So the risk management that is used to prevent the loss in short term is just a waste of time and resource. Namely, there is no financial risk in the long run, so the financial risk management in the short run will just offset the firm’s profits, and therefore reduce the firm’s value. However, in reality, financial risk management has already roused more and more attention. The need for risk management theory and measures soar to unprecedented heights for both the regulator and participants of the financial market. Those who think risk management is necessary argue that the need for risk management is mainly based on the imperfection of the market and the risk aversion manager. Since the real economy and the financial market are not perfect, the manager can increase a firm’s value by managing risk. The imperfection of the financial market is shown in the following aspects. First, there are various types of tax existing in the real market. And these taxes will influence the earning flow of the firm, and also the firm’s value. So the Modigliani ;amp; Miller theory does not work for the real economy. Secondly, there is transaction cost in the real market. And the smaller the transaction is, the higher the cost. Last but not least, the financial market participants cannot obtain the complete information. Therefore, firms can benefit from risk management. First, the firm can get stable cash flow, and thus avoid the external financing cost caused by the cash flow shortage, decrease the fluctuation range of the stock and keep a good credit record of the company. Secondly, a stable cash flow can guarantee that a company can invest successfully when the opportunity occurs. And it gets some competitive advantage compared to those who don’t have stable cash flow. Thirdly, since a firm possesses more resource and knowledge than an individual, which means it could have more complete information and manage financial risks more efficiently. If the manager of a firm is risk aversion, he can improve the manager’s utility through financial risk management. Many researches show that the financial risk management activities have close relation to the manager’s aversion to risk. For example, Tufano studied the risk management strategy of American gold industry, and found that the risk management of firms in that industry has close relation to the contract that the managers signed about reward and punishment contracts. The managers and employees are full of enthusiasm about risk management is because that they put great amount of invisible capital in the firm. The invisible capital includes human capital and specific skills. So the financial risk management of the firms became some natural reaction to protect their devoted assets. In conclusion, although controversy is still going on about the financial risk management, there is no doubt that the theory and tools of financial risk management is adopted and used by market participants, and continue to be enriched and innovated. IV. The Process of Financial Risk Management The process of financial risk management comprises strategies that enable an organization to manage the risks associated with financial markets. Risk management is a dynamic process that should evolve with an organization and its business. It involves and impacts many parts of an organization including treasury, sales, marketing, tax, commodity, and corporate finance. Company’s financial risk management can be divided into three major steps, namely identification or confirmation risk, measure risk and manage risk. Let’s illustrate it using the market risk as an example. First, confirm the market risk factors that have a significant influence to the company, and then measure the risk factors. At present, the frequently used measure of market risk approach can be divided into the relative measure and absolute measure. A. The relative measure method It mainly measures the sensitivity relationship between the market factors fluctuations and financial asset price changes, such as the duration and convexity. B. The absolute measure methods It includes variance or standard deviation and the absolute deviation indicator, mini max and value at risk (VaR). VaR originated in the 1980s’, which is defined the maximum loss that may occur within a certain confidence level. In mathematics, VaR is expressed as an investment vehicle or a combination of profit and loss distribution of ? -quantile, which stated as follows: Pr ( ? p ;lt;= VaR ) = ? , where, ? p said that the investment loss in the holding period within the confidence level (1 –? ). For example, if the VaR of a company is 100 million U. S. ollars in 95% confidence level of 10 days, which means in the next 10 days, the risk of loss that occurred more than 1 million U. S. dollars may of only 5%. Through this quantitative measure, company can clear its risks and thus have the ability to carry out the next step targeted quantitative risk management activities. (Guanghui Tian) The last step is management risk. Once the company identified the major risks and have a quantitative grasp of these risks through risk-measurement methods, those companies can use various tools to manage the risk quantitatively. There are different types of risk for different companies, even the same company at different stages of development. So it requires specific conditions for the optimization of different risk management strategies. In general, when the company considers its risk exposure more than it could bear, the following two methods can be used to manage the risk. The first way is changing the company’s operating mode, to make the risk back to a sustainable level. This method is also known as â€Å"Operation Hedge†. Companies can adjust the supply channels of raw materials, set up production plants in the sales directly or adjust the volume of inflow and outflow of foreign exchange and other methods to achieve above purpose. The second way is adjust the company’s risk exposure through financial markets. Companies can take advantage of the financial markets. Companies can take advantage of the financial markets wide range of products and tools to hedge its risk, which means to offset the risk that the company may face through holding a contrary position. Now various financial derivative instruments provide a sufficient and diverse selection of products. Derivative products are financial instruments whose value is attached to some other underlying assets. These basic subject matters may be interest rates, exchange rates, bonds, stocks, stock index and commodity prices, but also can be a credit, the weather and even a snowfall in some ski showplace. Common derivatives include forward contracts, swaps, futures and options and so on. V. The Challenges Faced by the Modern Financial Risk Management Theory Over the recent years, as the focus of risk management hifts from a control function to one of global financial optimization, the concern shifts from modeling the behavior of engineered contracts in selected markets to modeling the evolution of the entire economy. This change of focus calls for a vastly improved ability to model the time evolution of economic quantities. (Sergio Focardi). While those who do risk management are interested in predicting if assets will go up or down, the over-riding interest is in the relationship in movement to different assets. Though linear methods such as variance-covariance help to understand the co-movements of markets, a different set of tools is necessary to better manage risk. (Jose Scheinkman). Paradigms such as learning, nonlinear dynamics and statistical mechanics will affect how risk – from market and credit risk to operational risk – is managed. While the first attempts to use some of these tools were focused on predicting market movements, it is now clear that these methodologies might positively influence many other aspects of economics. For instance, they could be useful in understanding phenomena such as price formation, the emergence of bankruptcy chains, or patterns of boom-and-bust cycles. Lars Hansen, Homer J. Livingston professor of economics at the University of Chicago, remarks that these new paradigms will bring to asset pricing and risk management at enhanced understanding once the implicit underlying fundamentals are better understood. He says â€Å"What needed is a formal specification of the market structure, the microeconomic uncertainty, and the investor preferences that is consistent with the posited nonlinear models. Commenting on the need to bring together the pricing of financial assets and the real economy, he notes that an understanding of what’s behind pricing leads to a better understanding of how assets behave. â€Å"For risk management decisions that entail long-run commitments,† he observes, â€Å"it is particularly important to understand, beyond a purely statistical model, what is governing the underlying movements in security prices. † Blake LeBaron, professor of economics at the University of Wisconsin-Medison, observes that there is now more interest in macro moves than in individual markets. But traditional macroeconomics typically provides only point forecasts of macro aggregates. In the risk management context, a simple point forecast is not sufficient; a complete validated probabilistic framework is needed to perform operations such as hedging or optimization. One is after an entire statistical decision-making process. The big issue is the distinction between forecasts and decisions. (Blake LeBaron) Arriving at an entire statistical decision-making process implies reaching a better scientific explanation of economic reality. New theories are attempting to do so through models that reflect empirical data more accurate than traditional models. These models will improve our ability to forecast economic and financial phenomena. The endeavor is not without its challenges. Our ability to model the evolution of the economy is limited. Prof. Scheinkman notes that unlike in a physical system where better data and more computing power can lead to better predictions, in social systems when a new level of understanding is gained, agents start to use new methods. Prof. Scheinkman says â€Å"Less ambitious goals have to be set. Gaining an understanding of the broad features of how the structure of an economic system evolves or of relationships between parts of the system might be all that can be achieved. Prof. Scheinkman remarks that we might have to concentrate on finding those patterns of economic behavior that are not destroyed, at least not in the short-run, by the agent learning process. VI. Conclusion The theory foundation of modern financial risk management is the Efficient Markets Hypothesis, which notes that financial market is a linear balanced system. In this system, investors are rational, and they make their investment decision with rational expectations. This hypothesis shows that the changing of the future price of financial assets has no relation with the history information, and the return on assets should obey normal distribution. However, the study of economic physics shows that financial market is a very complicated nonlinear system. At the same time, behavioral finance tells us that investors are not all rational when making decisions. They usually cannot completely understand the situation they are facing unlike hypothesized. And most times they will have cognitive bias, when they use experience or intuition as the basis of making decisions. It will lead to irrational phenomena like overreaction and under reaction when reflected on investment behaviors. Therefore, it will be meaningful to study how to improve the existing financial risk management tools, especially how to introduce the nonlinear science and behavior study into the measurement of financial risk.

faulkner :: essays research papers

The Southern Social Themes of Barn Burning William Faulkner undoubtedly ranks one of the best and most influential writers both in America and in history. Among his various works of art, the most famous ones are those set in his fictional Yoknapatawpha County, which is molded out of his â€Å"native soil.† Despite their Southern setting, these works convey something universally true. As Faulkner often claims, he is just a story-teller, telling about man in conflict, about how he â€Å"endures and prevails.† Before he received due recognition, Faulkner wrote quite a few short stories which he expected would help him improve his economic condition, so that he could write novels at ease. Nevertheless, although he was motivated by economic interests, many of these short stories turned out very prominent. "Barn Burning" is one of Faulkner's most frequently anthologized, though its prose is a bit more ponderous than the garrulous first-person narration of "Emily." Set roughly 30 years after the Civil War, the story focuses on two members of the Snopes family: Ab Snopes, a poor sharecropper who takes out his frustrations against the post-Civil War aristocracy by burning barns, and his adolescent son, "Sarty," who dislikes his father's destructive tendencies and ultimately must choose between family and morality. This powerful coming-of-age story is notable for its conscientious prose styling, in which Faulkner mimics the inward turmoil and questions faced by his principal protagonist, as well as its carefully rendered settings of three historical milieus, each of which has important thematic concerns in the story: the sharecropper's cabin, the planter's mansion, and the town's general store. Faulkner incorporated the basic narrative of the story into his novel The Hamlet, though it is told in vastly different language and tone. Written as it was, at the ebb of the 1930s, a decade of social, economic, and cultural tumult, the decade of the Great Depression, William Faulkner's short story "Barn Burning" may be read and discussed by most of us as just that--a story of the '30s, for "Barn Burning" offers students insights into these years as they were lived by the nation and the South and captured by our artists. This story was first published in June of 1939 in Harper's Magazine and later awarded the 0. Henry Memorial Award for the best short story of the year. Whether read alone, as part of a thematic unit on the Depression era, or as an element of an interdisciplinary course of the Depression '30s, "Barn Burning" can be used to awaken students to the race, class, and economic turmoil of the decade.

How will you measure your life? Essay

1. How can I be sure that I’ll be happy in my career? Some people assert that money is the most powerful motivator in their lives, and the more money they earn, the more happiness they will have. However, from my personal perspective, I believe that getting more opportunity to learn what I am not familiar with, taking responsible for my behavior, contributing to others in need in the society, and trying my best to achieve my goals in my career are the most happiest things in my professional career life. In addition, from my point of view, management is the most effective way to get these points, if management practice well. The author states that â€Å" No other occupation offers as many ways to help others learn and grow, take responsibility and be recognized for achievement, and contribute to the success of a team.† So, it is important for me to learn well about management. This occupation of management also help the managers improve their skills. Learning from the process of doing business , what I have learned, is able to mak e my career more successful. For me, it is the reason to enable that I will be happy in my career. 2. How can I be sure that my relationships with my spouse and my family become an enduring sourceof happiness? In the business relationship, people invest to a program probably get reward immediately, but contributing to a family is not the same case of investment. For example, family may bring me what I need of happiness is a long-term process. In my case, the reason I try my best to work hard is to give my family members better lives and it is an indispensable goal of my life. In addition, I believe most individuals take the same responsibilities to hold a family. With the personal development, some people change their focus from families to their work. Consequently, they might forget the original purpose., so people should balance their work and family because of everyone’s limited resource, if not, people might make their lives to the different places what they previous intended to. Paying attention to what my family members need and how they feel about in this period is the most important thing for me.

5 Reasons to Avoid Plagiarism

Plagiarism has always been an unethical, despicable and generally frowned upon activity. Today, however, resorting to plagiarism is, in addition to that, a very, very unreasonable decision. Before the entire world went digital noticing that a particular piece of writing was plagiarized was realistic, but in most cases unlikely. If you were caught red-handed it meant that you either did a really poor job of appropriating someone else’s work, or were extremely unlucky. Today, with most academic materials easily available in digital format, with vast cooperation networks between major educational institutions all over the world, with a plagiarism check being accessible even for a middle school teacher, it is just plain silly to steal someone’s work and hope it will go unnoticed. And taking into account the possible consequences, it is easier and less stressful to do your job on your own: 1. Damage to Student Reputation Most schools, colleges and universities tend to treat plagiarism extremely seriously. In fact, it is one of the worst things a student can do, and often results in suspension or expulsion. It may go straight to academic record, preventing a student from being admitted to a college after school or to another college. 2. Damage to Academic Reputation Plagiarism consequences may be even worse if you are a scientist or are willing to build an academic career in future. After you are once caught on plagiarism your entire career is likely to be ruined, for publishing is an extremely important part of this line of work, and after your name has been associated with theft (and plagiarism is theft, after all), you are very unlikely to ever clear it. 3.  Damage to Professional Reputation Plagiarism is a taint that follows you around wherever you go, especially if you are businessperson or public figure of any sort. It implies that your reputation as a specialist doesn’t mean anything, that you are ready to resort to deception in order to achieve your goals – and even if you manage to keep your current position you are likely to be treated with a considerable degree of suspicion from now on. 4. Legal Problems Law doesn’t care if plagiarism is intentional or not. That’s why you have to learn how to avoid plagiarism on your own, especially if you belong to one of the writing professions, like journalists or authors. If plagiarism is discovered in your work and if the author of plagiarized work decides to sue you, it may even result in prison sentence. 5. Financial Consequences In addition to prison sentence, the offended party may demand a monetary restitution, to be paid either by the plagiarist or his employer (or an educational institution that allowed the work to be published). No wonder they are so eager to eliminate plagiarism before it has a chance to surface! Even if the fine is paid by your employer, and you personally avoid it, chances are you will never find another job in this profession ever again. All in all, plagiarism in today’s world is a cake that isn’t worth a candle. It is by far easier to write a work on your own than to pick up the pieces of your career for the rest of your life.