Corporate Risk Management and Value Creation

1 Introduction

1.1 The risk management paradox

1.2 The value of risk management

1.3 Objectives and structure of this book

1.A A few words on probabilities

1.A.1 Sample space and random variables

1.A.2 Discrete random variables

1.A.3 Continuous random variables

1.A.4 Covariance revisited

Part I: Risk management: what

2 Value creation from risk management

2.1 The universe of risks

2.2 Providing financial flexibility at minimum cost

2.3 Enhancing capital allocation and performance management

2.4 Maximizing operational and strategic flexibility

2.5 An integrated approach to risk management

2.6 Concluding thoughts

2.A Modigliani-Miller irrelevance results

2.B Risk typologies

2.C Mapping to “standard“ value creation levers

2.D Valuation fundamentals

2.E Calculations for examples 17 and 22: the pharmaceutical company

2.F Calculations for example 18: the oil company

2.G Risk adjustment

2.H Calculation for example 20: the option value

3 A review of risk management practices

3.1 Managing with volatility: Enterprise Risk Management

3.2 Measuring volatility: Value at Risk, Cash Flow at Risk, Economic Capital

3.3 Managing volatility: hedging and derivatives

3.4 What comes next?

Part II: Risk management: how

4 Enterprise risk analysis

4.1 Outside-in risk measurement

4.2 Inside-out risk identification and measurement

4.3 Multi-period analyses

4.4 Specificity of enterprise risk analysis

4.A Coal-fired plant profit under emission trading

4.B The aluminum smelter example

5 Risk capital

5.1 One-period firm

5.2 Risk capital for a multi-period firm

5.3 Concluding remarks

5.A Cost of capital comparisons

5.B One period Bernoulli example

5.C Multiperiod Bernoulli

6 Risk management strategy

6.1 A simplified risk management analysis framework

6.2 Optimal risk management strategy

6.3 Monte Carlo simulations

6.4 Changes in the firm’s business environment

6.5 Concluding observations

6.A Derivations of the optimal risk management strategy

7 Conclusion

7.1 Advice to current Chief Risk Officers

7.2 The path forward

Bibliography

Index