FINA Political Risk

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FINA Political Risk

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FINA 746
RISK MANAGEMENT
SPRING 2010

INSTRUCTOR: Ernst N. Csiszar

MEETING TIME: Monday @ 5:30pm – 7:45pm

OFFICE HOURS: By Appointment, Room 674

E-MAIL: ernst.csiszar@yahoo.com

The objective of this course is to explore value enhancement strategies that firms
employ by managing the risks and uncertainties they face. When done in a
comprehensive and integrated manner, the practice has become known as ―enterprise
risk management‖ (ERM). Thus, the course will focus on how a business addresses
various categories of risks and uncertainties, how these risks interact and interrelate
with each other, and how managers must then make decisions based on various
tradeoffs.

Not only is ERM a relatively new and developing strategic approach to value creation,
its execution also calls for a deep and thorough understanding of a firm’s business and
its environment as well as a capacity to identify, analyze, measure, manage, and
monitor a variety of complex and interacting existing and emerging risks.

The course is intended to address risk management issues in both financial and non-
financial firms, with particular attention paid to those concepts and methods that are
applicable to the real economy. While a background in mathematical methods will be
useful, it is not a prerequisite. The focus will be primarily on issues and assumptions
that various quantitative methodologies raise when applied to risk management.

While some commonalities exist, risk management requires an approach tailored to the
particular businesses that a firm engages in. Thus, risk management is more about
practice and less about theory. With some notable exceptions, such as financial risks,
that lend themselves to rigorous quantitative analysis, it is also more about experience,
judgment and talent from a qualitative standpoint.

Classes will take the format of discussions among us largely based on the readings,
case studies, and events as they occur. The expectation will be that you are thoroughly
familiar with the various cases and readings and that you are prepared to participate
fully when called upon. Students, as well as the instructor, are also expected to comply
with the University’s honors policy, more about which can be found at
http://sc.edu/academicintegrity.

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TEXTBOOKS:

Bernstein (1996) Against the gods: The remarkable story of risk. John Wiley &
Sons, Inc., New York.

For those students who are encountering risk management concepts for the first time,
the following text can serve as background reading:

Harrington and Niehaus (2004) Risk management and insurance (2nd Ed.)

Various supplemental readings and cases accessible via the internet or available
electronically through Harvard Business Publishing (HBP) are also assigned. The
cases assigned can also be accessed electronically at HBP or at Darden Business
Publishing (DBP), typically at a price of $6.95 apiece or less.

Daily reading of the Wall Street Journal and/or The Financial Times is also
recommended.

The instructor reserves the right to add readings or cases as they may become
available.

GRADES:

 Class participation: 30%. Your active participation in the discussion
in class is integral to the design of this course. Prior preparation of the
cases and assigned readings is essential as your familiarity with these
readings is presumed in the lectures and case discussions. It should be
noted and stressed that a significant portion of your grade—30%—
depends on your class participation. Those of you who may have difficulty
speaking up in class because of language or other reasons are
encouraged to meet with me to discuss how your participation in class can
be ensured.
 Two (2) individual case write-ups: 30%. You may choose any
two (2) cases for 15% each, due before class on the day the case is to
be discussed. Also include 3 to 4 overhead slides that summarize your
case write-up. The case write-ups should be brief, no more than 3 or 4
double-spaced pages. They are intended to be analytic discussions of
some issue central to the case. Please do not write a precis of the case or
repeat case facts except to reinforce your argument. Think about and
propose alternate risk management views, methods or action plans
whenever appropriate or discuss the relevance and applicability of the
tools or frameworks discussed in the readings and lectures. In short, do
not merely describe what the case author proposes but rather write about
what you think of the situation in the case.
 Group Research Report: 40%. A written plan for researching a
topic to be chosen by each group is due on Monday, February 15, 2010.

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The plan should contain detailed information regarding content, sources,
analyses proposed, and individual responsibilities for each member of the
group. The plan must meet the approval of the instructor. A full and final
report of 20-25 pages (not including appendices or exhibits) together with
an executive summary is due on April 19, 2010. Each group will also be
responsible for presenting its research to class on that same date. There
will be an opportunity for peer review assessments. If your colleagues’
assessment is less favorable, I will adjust the points earned from this
group research project.

COURSE OUTLINE
January 11 Introduction and overview of course
READINGS:
 Bernstein, Introduction and Chapters 1 – 4
 Swiss Re Bulletin (2004) The risk landscape of the future.

January 18 MLK Day

January 25 Risk management: Concepts, process, and organization

CASE STUDY: Contractual innovation in the U.K. energy markets:
Enron Europe, the Eastern Group, and the Sutton Bridge Project. (2003)
HBS Case #9-200-051

READINGS:
 Bernstein, Chapters 6, 9,14, 16, 17
 Froot, K. et al. (1994) A framework for risk management. Journal
of Applied Corporate Finance, Volume 7, Number 3.
 COSO Paper (2009) Strengthening Enterprise Risk Management
for strategic advantage.
 The Economist Intelligence Unit (2009) Managing risk in perilous
times: Practical steps to accelerate recovery.
 Stulz, R. (2008) Risk management failures: What are they and
when do they happen? Ohio State University, Fisher College of
Business Working paper #WP 2008-03-017.

February 1 Issue study #1: Economic risk and uncertainty

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CASE STUDY: Investment banking in 2008: A brave new world (A) and
(B). HBS Case

READINGS:
 Bernstein, Chapters 12, 15
 Jorion, P. (1999) Risk management lessons from Long-Term
Capital Management.
 Thomson, J. B. & Haubrich, J. G. (2009) Too big to fail and the
definition of systemic significance. FinReg21 Site.
 De Portu, M. (2009) The Everyman’s guide to the financial crisis.
 Societe Generale Cross Asset Research (2009) Worst-case debt
scenario: Protecting yourself against economic collapse.

February 8 Pause for Group Project Report (GPR) plan preparation
February 15 Issue study #2: Strategic risk and uncertainty
Written plan
of GPR due. CASE STUDY: The pharmaceutical industry: Challenges in the new
century. HBS Case #9-703-489

READINGS:
 Bernstein, Chapter 13
 Swiss Re Sigma 6/2007 To your health: Diagnosing the state of
healthcare and the global private medical insurance industry.
 Watson Wyatt Report (2009) Extreme risks.
 Gates, S. Incorporating strategic risk into Enterprise Risk
Management. Paper presented at the XV Conference
Internationale de Management Strategique, Annecy-Geneva,
June 2006.
 Swiss Re Sigma 1/2009 Scenario analysis in insurance.
 Cornelius et al. (2005) Three decades of scenario planning at
Shell.

February 22 Managing risk through insurance and reinsurance

CASE STUDY: The Chubb Corporation in China. (2008) HBS Case
#209021

READINGS:
 Bernstein, Chapters 5,
 The global property and casualty insurance industry. (1995) HBS
Industry Note #296033.
 Swiss Re Sigma 5/2009 Commercial liability for businesses and
their insurers.
 Swiss Re Sigma 6/2006 Credit insurance and surety: solidifying
commitments.
 Swiss Re Technical Publications (2002) An introduction to

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reinsurance.
 Swiss Re Sigma 5/2008 Insurance in the emerging markets:
Overview and prospects for Islamic insurance.

March 1 Issue study #3: Political risk and uncertainty

CASE STUDY: White nights and polar lights: Investing in the Russian oil
industry. HBSCase #795022.

READINGS:
 Bernstein, Chapters 7, 11
 The competitive advantage of Russia. HBS Note #9-IB7-3.
 Copley, W. D. & O’Leary, M. K. (1983) Introduction to political risk
analysis.
 Click, R. W. et al. (2009) Resource nationalism meets the market:
Political risk and the value of petroleum reserves. SSRN Abstract
#971147.
 World Bank Report 2009 World Investment and political risk.
 Hong, J. H. et al. Political risk and foreign investment decisions of
international hotel companies. Ideas and Trends, HotelOnline,
May 1999

March 8 Spring Break

March 15 Managing risk through derivatives

CASE STUDY: OSG Corporation: Hedging transaction exposure. HBS
Case HKU618

READINGS:
 Bernstein, Chapters 8, 10, 18
 Rebonato, R. (2003) Theory and practice of model risk
management. Oxford Financial Research Center, Working paper.
 Arora, S. et al. (2009) Computational complexity and information
asymmetry in financial products. Working paper.

March 22 Managing risk through structured finance

CASE STUDY: Financing PPL Corp.’s Growth Strategy. (2001) HBS
Case #202045.

READINGS:
 Bernstein, Chapters 6
 Coval, J. et al. (2009) The economics of structured finance.
SSRN Abstract #1287363
 Note on Islamic finance. HBS Note #200002

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March 29 Managing risk through securitization

CASE STUDY: The New Century Financial Corporation. (2008) HBS
Case #9-109-034

READINGS:
 Salmon, F. (2009) Recipe for disaster: The formula that killed
Wall Street. Wired Magazine 17.03.
 Fabozzi et al. (2007) Securitization: the tool of financial
transformation. SSRN Abstract #997079.

April 5 Issue study #4: Operational risks

READINGS:
 Tripp, M. H. Quantifying operational risk in general insurance
companies. Paper presented to the Institute of Actuaries, June
2004
 Tschoegl A. (2003) The key to risk management: Management.
Wharton Financial Institutions Center, Working paper.
 The Kerviel Affair - Progress Report of the Special Committee of
the Board of Directors of Societe Generale, February 20, 2008
 The Kerviel Affair – Report of the Board of Directors to the
general shareholders meeting of Societe Generale, May 22, 2008
 Shareholder report on UBS’s write-downs. 2008
 Managing operational risk at Mars, Incorporated. HBP B0911E

April 12 Alternative risk transfer

CASE STUDY: Nephila: Innovation in catastrophe risk insurance. HBS
Case 9-206-130.

READINGS:
 Swiss Re Sigma 1/2003 The picture of ART.
 Swiss Re Sigma 7/2006 Securitization – new opportunities for
insurers and investors.

April 19 Group Research Project due. GRP presentations.
April 26 Wrap-up and Evaluations
 Bernstein, Chapter 19