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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 nonfinancial 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 (2 nd 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:
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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.
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.
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.
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.
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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
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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
Written plan of GPR due.
Issue study #2: Strategic risk and uncertainty
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.
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Swiss Re Sigma 6/2006 Credit insurance and surety: solidifying commitments.
 Swiss Re Technical Publications (2002) An introduction to
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March 1
March 8
March 15
March 22
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 Swiss Re Sigma 5/2008 Insurance in the emerging markets:
Overview and prospects for Islamic insurance.
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
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The competitive advantage of Russia.
HBS Note #9-IB7-3.
 Cop ley, 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.
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Hong, J. H. et al. Political risk and foreign investment decisions of international hotel companies.
Ideas and Trends, HotelOnline,
May 1999
Spring Break
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.
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Arora, S. et al. (2009) Computational complexity and information asymmetry in financial products.
Working paper.
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
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Note on Islamic finance.
HBS Note #200002
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March 29
April 5
April 12
April 19
April 26
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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.
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.
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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
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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.
Group Research Project due. GRP presentations.
Wrap-up and Evaluations
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Bernstein, Chapter 19
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