Risk Management

MBA 454.08
COB 22E

Fall 2011

Monday 6.00 8.50 PM

 


Professor Richard MacMinn

 
 

 

Edmondson-Miller Chair

Katie School
College of Business
COB 432A
Illinois State University
Normal, IL 61790

Office: +1 309 438-7993
E-mail: richard.macminn@ilstu.edu

Office Hours: by appointment

Graduate Assistant
Daniel Hillary
E-mail: dthilla@ilstu.edu
 

Description:
 

This course will cover the notions of risk, choice, and risk management from primarily a corporate perspective.  Corporations face a number of risks including market, technological, operational, political, legal and financial risks. Viewing the organization as a bundle of risks, this course will provide a perspective on how the risks are selected, financed, and managed; the management of risk includes the avoidance, reduction, and transfer with tools including debt, equity, options, insurance, reinsurance and derivatives.  Participants will gain an understanding of the theory and issues relevant to the management of pure and speculative risks. Participants will have a chance to discuss the issues and practises surrounding risk management.

 

 

Recommended Reading:

Banks, Erik (2004), Alternative Risk Transfer: Integrated Risk Management through Insurance, Reinsurance and the Capital Markets, John Wiley & Sons

Brown, Gregory W.  and Donald H. Chew, editors, (1999), Corporate Risk: Strategies and Management, Risk Books
 

Bernstein, Peter (1998), Against the Gods: The Remarkable Story of Risk, John Wiley and Sons

Chapman, Robert J. (2006). Simple tools and techniques for enterprise risk management. Wiley

Crouhy, M., D. Galai, et al. (2001). Risk Management. New York, McGraw-Hill. 

Doherty, N. A. (2000). Integrated Risk Management: Techniques and Strategies for Managing Corporate Risk. Boston, McGraw-Hill.

Doherty, N. A. (1997). "Financial Innovation in the Management of Catastrophe Risk." Journal of Applied Corporate Finance 10(3): 84-95.
 

Froot, K. A., D. S. Scharfstein, et al. (1993). "Risk Management: Coordinating Investment and Financing Problems." Journal of Finance 48: 1629-58.

Froot, K. A., D. S. Scharfstein, et al. (1994). "A Framework for Risk Management." Harvard Business Review: 91-102.

Harrington, S. E. and G. R. Niehaus (1999). Risk Management and Insurance. Boston, McGraw-Hill.

Lam, J. (2003). Enterprise risk management : from incentives to controls. Hoboken, N.J., Wiley.

Mari, Dominique Drouet and Samuel Kotz (2001). Correlation and Dependence, Imperial College Press

MacMinn, R. D. (2005). The Fisher Model and Financial Markets. Singapore, World Scientific Publishing

McNeil, Alexander J., Rudiger Frey and Paul Embrechts (2005). Quantitative Risk Management. Princeton University Press

Moeller, Robert R. (2007). COSO Enterprise Risk Management. Wiley

Nelsen, R. B. (1999). An Introduction to Copulas. New York, Springer.

Newhouse, J. P. (2002). Pricing the Priceless: A Health Care Conundrum. Cambridge, MIT Press.

Stiglitz, J. E. (2002). Globalization and Its Discontents. New York, W. W. Norton.

Stulz, R. M. (1996). "Rethinking Risk Management." Journal of Applied Corporate Finance 9(3): 8-24.

The J.P. Morgan/Arthur Andersen Guide to Corporate Risk Management, Risk Publications, 1997

Tufano, P. (1996). "Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry." Journal of Finance 51(4): 1097-1137.


Assessment

Assessment will be by one 2,000-word literature review (50%), and one group project (50%).  The literature review of an approved topic is due no later than November 19th; submission should be electronic.  The group project is due on the day it is presented in class, i.e., either November 28th or December 5th.  Presentation schedules will be announced before the Fall break. 

The literature review must demonstrate a thorough knowledge of the relevant literature as well as an understanding of the theoretical issues and practical application of risk management to the topic. All sources used in writing the review must be properly cited in the standard Harvard or Chicago style.

 



Course Outline

 The course schedule is tentatively as follows:

 

Meeting

Time

Location

Topic

22 August

6:00-8:50

COB 22E

Introduction

Course and student introductions

Introduction to RefWorks and database searches

 

29 August

6:00-8:50

COB 22E

Risk

MacMinn, R. D. (1999) Risk and Choice, Keynote speech to The International Risk Management and Insurance Conference, Taipei

Lecture On the Roots of Risk Management

Enterprise Risk Management (ERM)

Ai, Jing and Patrick Brockett (2006). Enterprise Risk Management, University of Texas, Austin, Texas

Lam, J. (2003). Enterprise risk management : from incentives to controls. Hoboken, N.J., Wiley

 

 

 

 

 

12 September

 

 

Tutorials on Mathematica

Mathematica assignment

 

 

 

 

 

19 September 6:00-8:50 COB 22E

Expected Utility:

Doherty, chapter 2

Friedman, Milton, and Leonard J. Savage, (August 1948) "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, 56(4): 279-304.

MacMinn, Richard, (1995). "Lecture Notes on the Expected Utility Theorem." University of Texas

Pratt, J. W. (1964). "Risk Aversion in the Small and in the Large." Econometrica 32: 122-36.

Lecture On Pratt

Rothschild, M. and J. E. Stiglitz (1970). "Increasing Risk:  I. A Definition." Journal of Economic Theory 2: 225-43.

Lecture On Rothschild and Stiglitz

Yaari, M. E. (1987). "The Dual Theory of Choice Under Risk." Econometrica 55(1): 95-115
 

       
26 September

6:00-8:50

COB 22E

Moral Hazard and Adverse Selection

Banks, chapter 1

Doherty chapter 3

Shavell, S. (1979). "On Moral Hazard and Insurance." Quarterly Journal of Economics 93(4): 541-562.

Rothschild, M. and J. E. Stiglitz (1976). "Equilibrium in Competitive Insurance Markets:  An Essay on the Economics of Imperfect Information." Quarterly Journal of Economics 90: 629-50

Lecture On Rothschild and Stiglitz

 

       
3 October

6:00-8:50

COB 22E

Portfolio Theory, Capital Market Theory and Risk Management

Doherty chapters 4, 5, 6

Tobin, J. (1958). "Liquidity Preference as Behavior Toward Risk." Review of Economic Studies 25(2): 65-86.

Lecture On Tobin

Samuelson, P. A. (1967). "General Proof That Diversification Pays." Journal of Financial and Quantitative Analysis 2(1): 1-13.

MacMinn, R. D. (1984). "A General Diversification Theorem: A Note." Journal of Finance 39(2): 541-50.

Financial markets and risk allocations

Diamond, P. (1967). "The Role of a Stock Market in a General Equilibrium Model with Technological Uncertainty." American Economic Review 57: 759-73

Lecture On the Fisher Model

Corporate Finance Theorems

MacMinn, chapters 1, 2, 3, 4

MacMinn, Richard, The Risk-Shifting Problem and Convertible Bonds, Advances in Quantitative Analysis of Finance and Accounting, 1993

 

10, 17 October

6:00-8:50

COB 22E

Hedging

Doherty chapter 8

Froot, K. A., D. S. Scharfstein, et al. (1994). "A Framework for Risk Management." Harvard Business Review: 91-102.

Froot, K. A., D. S. Scharfstein, et al. (1993). "Risk Management: Coordinating Investment and Financing Problems." Journal of Finance 48: 1629-58.

Lecture on Hedging

 

       
24 October

6:00-8:50

COB 22E

Stock Options and Compensation

MacMinn, chapter 4

Cummins, J. D. and N. A. Doherty (2006). The Economics of Insurance Intermediaries. Journal of Risk and Insurance 73: 359-396.
 

       

31 October

7 November

6:00-8:50

COB 22E

Risk Management

Banks, chapters 1, 2 and 3

Doherty, chapters 1, 7 and 8

Risk Management claims

Lecture On risk management

Stulz, R. M. (1996). "Rethinking Risk Management." Journal of Applied Corporate Finance 9(3): 8-24.

Smith, C. W. and R. M. Stulz (1985). "The Determinants of Firms' Hedging Policies." Journal of Financial and Quantitative Analysis 20(4): 391-405.

Tufano, P. (1996). "Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry." Journal of Finance 51(4): 1097-1137.

Darlington, Angela, Simon Grout, John Whitworth, How safe is safe enough?  An introduction to risk management, Presentation to the Staple Inn Actuarial Society, 12 June 2001

Lecture on Corporate risk management

 

       

14 November

6:00-8:50

COB 22E

Derivatives

The J. P. Morgan/Arthur Andersen Guide to Corporate Risk Management, Risk Publications, 1997

Lecture on Derivatives and Corporate Risk Management

Brennan, M. J. (1995). "Corporate Finance over the Past 25 Years." Financial Management 24(2): 9-22.

Rothschild, M. and J. E. Stiglitz (1970). "Increasing Risk:  I. A Definition." Journal of Economic Theory 2: 225-43.

 

 

 

 

 

21 November

 

 

Thanksgiving Week
No class

       

28 November

6:00-8:50

COB 22E

Alternative Risk Transfer and Finance (ART)

Banks, chapter 3, 7-9

Laster, David S., Mayank Raturi, Capital Market Innovation in the Insurance Industry, Sigma No. 3/2001

Laster, David S., Insurance Linked Securities, Swiss Re New Markets 1999

Helfenstein, R., "Securitization - New Opportunities for insurers and investors," Sigma No. 7/2006

 

 

 

 

 

5 December

6:00-8:50

COB 22E

Enterprise Risk Management (ERM)

Course evaluation

Ai, Jing and Patrick Brockett (2006). Enterprise Risk Management, University of Texas, Austin, Texas

Lam, J. (2003). Enterprise risk management : from incentives to controls. Hoboken, N.J., Wiley

 

       

 

 


Modification Date:  Monday, 10 September 2012 08:06 -0700
Comments to: Richard MacMinn