Venue: Belgrade. Date: To be announced

Course Description and Objectives

At times of global financial crisis, failures of risk management and increasing risk exposure of both financial and non-financial companies makes understanding of measuring and management of risk one of the most important strategic issues. For financial and non-financial companies alike it is critical to assess, qualitatively and quantitatively, their heightened risk exposure and take steps towards risk control. It is only when considered in a holistic, integrated way, that risk management becomes truly useful. Such approach, called Enterprise Risk Management or ERM is the subject of the training program.

The program will focus on understanding financial risk management strategies, and examples used may come from areas such as commodities, insurance, financial markets, agriculture, and banking and credit. Delegates will also gain Excel risk management experience. The course will set out how to measure and analyze risk as well as explain the available measures for mitigating risk and the impact of risk on firm value in theory and practice.

This course will be delivered through a combination of interactive lectures and practical case studies and worked examples, building understanding of risk management step by step. Delegates will be provided with software to take away as well as a range of other hard and soft copy materials.

Expected Outcomes

Participants in this course will gain:

• Ability to analyze risks to corporate value drivers and their consequences
• Ability to assess/develop/implement mechanisms for risk management across a wide range of risks
• Understanding of ERM components
• Understanding of the theory and practice of optimal capital structure
• Understanding of VaR and its compenents
• Understanding of Earnings at Risk concept and applications
• Knowledge of Monte Carlo software mechanics in order to make realistic risk simulations
• Knowledge of forecasting methods and software
• Knowledge of methods of hedging and instruments needed for hedging
• Understand issues related to risk management in emerging markets
• Learn what are the major challenges faced by financial sector and regulators in emerging markets, related to risk management

Who should attend

This course is designed for risk managers, consultants, corporate finance specialists, finance directors of companies, treasurers, and all those interested in better understanding risks facing companies in these trying times.

Course Outline

Day 1 (Lecturer: Julian Roche)

1. Introduction: what is risk?

2. Sources of risk

•  Inflation
• Interest Rates
• Cost of financing
• Input (Commodity) Costs
• Market Risk
• Credit Risk
• Liquidity Risk
• Specific sectoral risk (eg real estate)
• Regulatory Risk

Case Studies: Examples of the eventuation of risk of each type and its consequences for a range of large and small firms in Europe and emerging markets

3. Measuring Risk

• What is risk and how should it be defined?
• What statistical background is required?
• Estimating prices
• Bankruptcy risk and how to predict it (Z-scores etc)
• Measuring Risk: portfolio theory
• Sensitivity analysis
• Scenario analysis and Monte Carlo analysis

 Exercise: Using Monte Carlo and evaluating its benefit

•  Value-at-Risk (VAR) and Earnings-at-Risk (EAR)
• RORAC and RAROC
• Applications to corporates

 Case Studies: VaR/EaR Excel models for evaluation

•  Measuring risk on financial statements
• Credit Scoring

Case Studies: Analyzing risk potential: rating agency approaches/examples of rating and their problems

4. Forecasting

• Inputs to Forecasting Models
• Methods of Forecasting – heuristic, time series and regression
• Available software models
• Practical examples

Exercise: Forecasting manufacturing demand

5. Introduction to Risk Management

• Demand estimation for corporates and financial services
• Risk management introduction
• Comparative advantage in risk management
• Risk management strategy examples
• Risk and utility
• Moral hazard and Adverse Selection
• Benefits of risk reduction

Case Study: Risk  management failure in corporates – from Barings to China Aviation Oil

6. Approaches to risk management

• Consultancy/banks and firm risk management
• Cost of risk to firms
• Benefits of risk reduction

 Case Study: Risk Management and Value Creation

 Day 2 (Lecturer: Julian Roche)

7. Derivatives

• Futures and options
•  Forward contracts
• Swaps and complex derivatives
• Hedging in practice
•  The Greeks

Case Study: Simulation and Option Pricing Models (Excel and other software)

8. Structured Finance Solutions

• Structured notes & the failure of credit derivatives
• The role of insurance
•  Multi-line and multi-trigger programs
• Securitization and its problems
• Other structured solutions

Case Study: structuring a Structured Note

9. Liquidity Risk

• Definitions of liquidity
• Types of liquidity risk
• Measurement of Liquidity Risk
• Ratio Analysis
• Managing Liquidity Risk

 Case Study: Long-Term Capital Management and its lessons

10. Corporate Risk Management        

• Enterprise-wide risk management governance and processes (ERM)
• Promoters, sellers and consumers of ERM
• Benefits and disadvantages of ERM
• Risk identification - risk tolerance  - types of risk
• Risk retention decision (planned vs. unplanned)
• Quantification of total risk exposure
• Risk monitoring, reporting, control (ex ante vs. ex post)
• Taxation and Accounting Issues (Fama & French et al)

 Case Study: Concept and Application of Risk-Adjusted Performance Measures (RAPM)

11. Financial engineering strategies and techniques  

• Retained earnings strategies
• Corporate finance strategies (eg spin-offs, carve-outs, off-balance sheet financing)
• M&A and risk management
•  Balance sheet hedging, consolidation, mitigation and diversification

Case Study: Financial Engineering examples from Europe and the USA

12. Beyond Risk – the corporate risk retention decision 

• Corporate value and risk
• Risk tolerance
•  Optimal capital structure and its financial implications
• Rating capital and  models (S&P, Moody's,  etc)
• Regulatory requirements  

Case Study: Corporate risk and cash flow models. ERM and value: what makes firms succeed and fail?

 Day 3 (Lecturer: Miloš Božović)

13. Issues related to credit and operational risk management

• Data
• Methodology
• Culture
• Incentives

14. Issues related to market risk management

• Exchange rate risk
• Exposures to local and international debt
• Exposures to local and international equity
• Liquidity

 15. Other issues

• Regulatory compliance
• Interaction of credit and market risk
• Macroeconomic, political and legal risks

16. Challenges for financial regulators in emerging markets

• Towards Basel II: How far and how fast
• Technical skills and procedures for supervision
• Reconciling regulation with accounting standards
• Changing the supervisory mindset                                                   

17. Financial crisis: Effects on emerging markets