American natural gas markets, case study, 96–97
Asian Options. See Average Rate Options
Asset backed commercial paper, and 2008 crisis, 65–68
Average Rate Options, 88
Barings Bank, case study, 140–142
Barrick Gold Corporation, case study, 118–120
Basic necessities, for risk management governance
clear lines of control, accountability, and limits, 139–140
Barings Bank, case study, 140–142
data management system, 137–139
objectives, setting of, 135–137
risk management philosophy, develop and communicate, 132–134
Florida electric utilities, case study, 134–135
BBB-rated company, 110
Beta, 51
Big Mac Index, case study, 78
Black Swan, 60
Blockchain, 6
Brent Crude, 100
Canceling trade. See Closing trade
Capacity, credit analysis technique, 113
Capital, credit analysis technique, 113
Capital structure management, for interest rate risk, 64–65
Case study
American natural gas markets, 96–97
asset backed commercial paper, and 2008 crisis, 65–68
Barrick Gold Corporation, 118–120
Big Mac Index, 78
Florida electric utilities, 134–135
Long Term Capital Management, 61
Cash Flow at Risk, 56
Cash-settled derivative, 82
versus physically settled, 25–26
Catastrophe risk, 9
Character, credit analysis technique, 112–113
Collateral, credit analysis technique, 113
Collateralized debt obligations (CDOs), 6
management
Barrick Gold Corporation, case study, 118–120
Corney & Barrow, case study, 126–127
with financial derivatives, 123–124
operational strategies, 122–123
Complex adaptive systems, 3, 13
Compliance, credit analysis technique, 114
Conditions, credit analysis technique, 113
Contract. See Derivatives
Corney & Barrow, case study, 126–127
Correlation, 49
calculation of, 50
Credit agencies, 4
Credit policy, of firm, 114–115
management
credit policy, developing, 114–115
metrics. See Metrics, for credit risk
Cryptocurrencies, 6
Currency exposure, 80, 82, 85, 133
management
Big Mac Index, case study, 78
Caterpillar, case study, 84–85
operational strategies, hedging with, 79–81
strategic, 75
transactional, 75
translational, 75
Caterpillar, case study for, 84–85
Data management system, 137–139
Debt-to-equity ratio, 113
commodity risk management with, 123–124
exchange traded, versus over-the-counter, 26–28
physically settled, versus cash-settled, 25–26
Directors
risk training for, 143
Dollar Value of a Basis Point, 50
DV01. See Dollar Value of a Basis Point
Effective governance, elements of, 142–145
Energy risk management, 8
American natural gas markets, case study, 96–97
hedging tools, application of, 100–102
process, 103
Enterprise risk management, 43, 132, 142
Exchange traded derivatives, 28–29, 73
versus over-the-counter, 26–28
Explicit costs, 34
Exposure, 110
Extensive risk framework, 34–35
External credit risk management, 105
Fat-tails. See Leptokurtosis
Federal Energy Regulatory Commission (FERC), 99
Financial risk management
commodity risk. See Commodity risk, management
currency risk. See Currency risk, management
energy risk. See Energy risk management
framework
governance
Barings Bank, case study, 140–142
basic necessities for, 132–142
effective, elements of, 142–145
Florida electric utilities, case study, 134–135
introduction to, 129
Procter and Gamble, case study, 129–131
senior managers and directors, guidelines for, 145–146
strategic, 7
interest rate risk management. See Interest rate risk, management
metrics. See Metrics, for financial risk management
personal basis, role of, 151
structural issues for, 147–150
technology issues for, 150
tenets. See Tenets, financial risk management
choosing between doing nothing, hedging with forward, and option contract, 21–23
closing/canceling trade, 28–30
financial derivatives. See Derivatives
Southwest Airlines, case study, 23–25
Financial Risk Manager, 6
Fintech technologies, 4, 6, 147, 150
Five(six) Cs, of credit analysis, 112–114
Floor level, 70
Florida electric utilities, case study, 134–135
Forward rate agreements (FRAs), 68, 71–72
Framework, financial risk management
Global Association of Risk Professionals, 6
Global economy, and currency risk, 8
Good framework, essentials of, 36–44
appropriate accountability, 42–43
appropriate training, 42
clear objective, 37
effective reporting, and communication, 41
implement risk action, choose and, 39–40
integration, 43
monitoring and assessing, 40–41
risks, identification of, 38
Hard currency, 77
Heating degree day (HDD) swap, 125–126
Hedging, 10
choosing between doing nothing, forward contract, and option contract, 21–23
currency, with operational strategies, 79–81
strategy, of firm, 7
tools, application of, 100–102
Homeostasis, risk, 34
Implicit costs, 35
Intercontinental Exchange (ICE), 96
floor, 70
Interest rate risk, 8
Internal credit risk management, 105
Investment grade, 110
Leptokurtic distribution, 58
Loan, expected loss on, 110
in American natural gas markets, 96–97
London Interbank Offer Rate (LIBOR), 30–31, 68–69
Long Term Capital Management, case study, 61
Long-term debt, 73
versus short-term debt, 65
Main Street, 148
Metrics
five (six) Cs of credit analysis, 112–114
for financial risk management
historical relationships, 48–53
Long Term Capital Management, case study, 61
risk metrics, dangers of, 57–60
Mitigation, financial risk, 15, 39, 95, 131, 136
Model risk, 49
Monte Carlo Simulation, 53–55, 137
Mortgage-backed securities (MBS), 66
Multinational companies, 133
Negative correlation, 49
Negative risk, 15
New York Mercantile Exchange (NYMEX), 96
Operational strategies
for commodity risk management, 122–123
for financial risk management, 16–18
Option type strategies, 81
Over-the-counter derivatives, 29–30, 123
Philosophy, financial risk management, 132–135
Physical contracts, 101
Physically settled derivative, 82
Positive correlation, 49
Present Value of a Basis Point, 50
Price Cap program, 5
Primary, degree of exposure, 92
Procter and Gamble, 45–46, 129–131
Product basis. See Quality basis
Professional Risk Manager designation, 6
Professional Risk Manager’s International Association (PRMIA), 6
Purchasing Power Parity, 77
Big Mac Index, case study for, 78
PV01. See Present Value of a Basis Point
Quality basis risk, 95
Regression analysis, 51
Risk
catastrophe, 9
elements of, 2
homeostasis, 34
interest rate, 8
management, 12–13, 142–145. See also Financial risk management
negative, 15
perception of, 148
weather, 9
Scenario analysis, 53
Secondary, degree of exposure, 92
Semi-standard deviation, 53
Senior managers
risk training for, 143
Share price volatility, 4
Short-term debt, versus long-term debt, 65
Skew, 52
Southwest Airlines, case study, 23–25
Strategic currency risk, 75
Structural issues, for financial risk management, 147–150
interest rate, 30–31, 68–69, 84
Technology issues, for financial risk management, 150
Tenets, financial risk management
adds value, 14
financial risk is still risk management decision, ignoring/being unaware of, 10–11
firms are not in business to take financial risk, 9–10
hope is not prudent, strategy, 11
is as much an art as it is a science, 11–12
only perfect hedge is in Japanese Garden, 12–13, 15
risk management is complex, 13
Tertiary, degree of exposure, 92
Thumb, general rule of, 134
Tools, for financial risk management, 18–32
Training, for risk management, 142–143
Transactional currency risk, 75
Translational currency risk, 75
Treasury Bond futures, 73
Value at Risk (VAR), 55–57, 138
Volatile energy price, 8
Wall Street, 148
Corney & Barrow, case study, 126–127
Weather risk, 9
West Texas Intermediate crude, 100
Wild Card Option, 73