FINA 746
RISK MANAGEMENT
SPRING 2009
INSTRUCTOR: Ernst N. Csiszar
MEETING ROOM: BA 302
MEETING TIME: Monday @ 5:30pm – 7:45pm
OFFICE HOURS: By Appointment, Room 674
PHONE: 803.404.1326
E-MAIL: erniecsiszar@moore.sc.edu
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. 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.
In line with this approach to managing risk and uncertainty, the emphasis in this course will be on events as they
occur, on case analyses that demonstrate how other firms have managed risk, on readings that identify practical
risk management skills, and on historical context that lends subtlety and texture to your understanding. This
course will challenge you to think and act. It will place demands on your time since there are multiple readings
for each section ranging from theoretical and historical background to cases to supplemental readings and to the
daily perusal of the Wall Street Journal.
Classes will take the format of discussions among us largely based on the case studies. The texts and the readings
are intended to supplement these cases. The expectation will be that you are thoroughly familiar with the
various cases and readings, that you are prepared to participate fully, that you will be called upon to participate,
and that there will be “no place to hide”.
I always hesitate to make attendance mandatory for students who are presumed to bring a measure of maturity
to their studies. I do find it difficult however to conceive how one can expect a good grade without attending,
particularly since the class will involve discussions. I will also arrange for a number of guest speakers. Given the
need for flexibility with dates for these speakers, I will announce them at least a week in advance of their
appearance. I reserve the right to include questions related to guest speakers and discussions on the exam.
TEXTBOOKS:
Harrington and Niehaus (2004) Risk management and insurance (2nd Ed.)
Bernstein (1996) Against the gods: The remarkable story of risk
Various supplemental readings accessible via the internet or available electronically through Harvard
Business Publishing (HBP) will also be 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 is also recommended.
GRADES:
Class participation: 20%
Individual case mini-presentations (15 minutes each): 5% each
Group case studies (2) write-up: 40%. You can choose 2 cases for 20% each, due before discussion of the
particular case in class. There will be an opportunity for peer review assessments. If your colleagues’
assessment is less favorable, I will adjust the points earned from these case write-ups.
Final exam: for the balance. The exam will consist of a combination of multiple choice and true/false
questions as well as short answers and brief essays.
PROJECT FINANCE STUDENTS: Students with a special interest in PROJECT FINANCE will have the
opportunity to develop an understanding of the subject by opting for the case studies and additional
readings that are listed in the Course Outline under PROJECT FINANCE, as adjusted from time to time via
Blackboard. The additional texts prescribed for students with an interest in Project Finance are:
Finnerty, John D. (2007) Project Financing: Asset-based Financial Engineering, Wiley Finance
Standard & Poor’s (2008) Global Project Finance Yearbook, available on the Internet
Note that the Supplemental readings listed in the course outline are intended for all students, whether
focused on Project Finance or not, while the Additional readings are intended only for those students
with
a
specific
interest
in
Project
Finance.
COURSE OUTLINE
DATE
TOPICS, CASES, AND READINGS
PROJECT FINANCE
January 12
Creating value by managing risks and uncertainties
Introduction to Project Finance
Textbooks: H&N - Ch. 1, 2, 20; B – Introduction, Ch. 1, 2, Textbook: Ch. 1, 2, 3
3, 4, 5
Supplementary readings:
2008 Yearbook: The changing face of infrastructure
(1) Daula (2006) Risk management at Morgan Stanley: finance, p. 9
An overview
January 19
January 26
MLK Day
Strategic foresight: Risk and uncertainty as
opportunities
Case study: The Pharmaceutical Industry
Textbooks: B – 6, 7, 8
Supplemental readings:
(1) Cornelius et al. (2005) Three decades of scenario
planning in Shell, HBP, CMR 326
(2) Gates, Stephen (2006) Incorporating strategic risk
into Enterprise Risk Management, www.strategieaims.com/aims06/www.irege.univsavoie.fr/aims/Programme/pdf/SP26%20GATES.pd
f
(3) Slywotzky and Drzik (April 2005) Countering the
biggest risk of all,
www.sirim.my/techinfo/P3/Management/MacApril05/mac-april05_article17.pdf
(4) Bookstaber (1999) Risk management in complex
organizations, Perspectives, Association for
Investment Management and Research, 18
(5) Prahalad and Hamel (2001) Core competence of
the corporation, HBP #6528
(6) Aswath Damadaran (2005) The promise and peril
of real options,
www.stern.nyu.edu/~adamodar/pdfiles/papers/real
Project finance risks from a strategic perspective
Case Study: Iridium LLC, HBP, #200039
Textbook: Ch. 5, 15
2008 Yearbook: Turning coal into liquid gold, p.26
February 2
February 9
February 16
opt.pdf
Models and tools for managing risks and
uncertainties
Case study: Petrolera Zuata
Textbooks: H&N – Ch. 3, 9, 22, 26; B – 9, 10, 11
Supplemental readings:
(1) Fabozzi et al. (2007) Securitization: The tool of
financial transformation,
http://ssrn.com/abstract=997079
(2) Bank of International Settlements (BIS) June 2008
Semiannual OTC derivatives statistics; Exchange
traded derivatives statistics to Q3 2008,
www.bis.org/statistics/derstats.htm
(3) Buehler & Pritsch (2003) Running with risk, Inc.
Magazine,
www.inc.com/articles/2003/09/runningwithrisk.htm
l
(4) Oliver Wyman Website (2006) The new finance and
risk agenda: What’s your risk appetite?, Insights
(5) Nassim Taleb’s essay in Edge: The third culture,
(2008) The fourth quadrant: A map of the limits of
statistic
(6) Fractal financial markets, Economymodels.com
Political risks: At home and in emerging markets
Case study: (1) White nights and polar lights
(2) The competitive advantage of Russia
Textbooks: B – 12, 13
Supplemental readings: Marsh Risk Alert (2008)
Understanding China’s business risk environment,
Volume 5, Issue 3
The global economy: Macro and micro economic
risks and uncertainties
Case study: Boeing 787: The Dreamliner
Textbooks: B – 14, 15, 16
Supplemental readings:
(1) Global risks 2008: A Global Risk Network Report,
Models and tools for project finance risks
Case Study: In addition to Petrolera Zuata, Poland’s
A2 Motorway, HBP, #202030
Textbook: Ch. 9, 10, 11, 16
Political risk in project finance
Case study: BP Amoco Caspian (A) and (B), HBP
#201504 and #201067
Dabhol, HBP #HKU707
Textbook: (Continued)
Macro and micro economic risks in project finance
Case study: Airbus A3XX (A) and (B), HBP #201028
and #201126
Textbook: (Continued)
February 23
March 2
March 9
March 16
March 23
World Economic Forum
(2) BIS 78th Annual Report, June 30, 2008
Wall Street: Specific risks related to financial
institutions
Case study: New leaders of financial giants: The cases of
Vikram Pandit (Citi) and John Thain (Merrill Lynch)
Textbooks: B – 17, 18, 19
Supplemental readings:
(1) Shareholder report on UBS’s write-downs, 18 April
2008
2008 Yearbook: Updated Project Finance summary
debt rating criteria, p.86
Main Street: Sources and techniques for funding
in Project Finance
Case study: Aluminium Bahrain and Supplement,
HBP #205027 and #205708
Textbook: Ch. 4, 12
Taxation, regulation, accounting, and legal systems:
Business practices and compliance risks
Case study: New Century Financial Corporation
Textbooks: H&N - Ch. 21
Supplemental reading:
(1) Gillan & Martin (2002) Financial engineering,
corporate governance, and the collapse of Enron,
SSRN:http://ssrn.com/abstract=354040
Spring Break
Hazard risks: Insurance, capital markets, and the
alternative risk market
Case study: Nephila: Innovation in catastrophe risk
insurance
Textbooks: H&N – Ch. 4, 8, 10, 18, 23, 25
Supplemental readings:
(1) Csiszar (2007) An update on the use of modern
financial instruments in the insurance sector, 32
The Geneva Papers 319-331
Financial risks: currencies, interest rates, and
commodity prices
Case study: OSG Corporation: Hedging transaction
exposure
Textbooks: H&N – Ch. 24
Supplemental readings:
Structuring the project
2008 Yearbook: The evolving landscape
subordinated debt in Project Finance, p.80
for
Case study: Australia – Japan Cable, HBP #203029
Textbook: Ch. 7, 17
2008 Yearbook: Ringfencing a subsidiary, p.98
Going to the extreme in Project Finance
Case study: Mozal, HBP # 200005
Ch. 8 and the role of collateral security
Financial engineering and Project Finance
Case study: Contractual innovation in the UK energy
markets, HBP #200051
Ch. 13 and credit enhancement
March 30
April 6
(1) Oliver Wyman (2007) Realigning risks and rewards
in the energy sector
(2) Mark Wahrenburg, (1996) Hedging oil price risk:
Lessons from Metallgesellschaft
(3) Interest rate derivatives, HBS #294095
Financial risks: market, credit, and liquidity
Case study: Risk exposure and risk management at
Korea First Bank
Textbooks: H&N – Ch. 24
Supplemental readings:
(1) The Asian economic downturn: Two years beyond
the crisis, 1999 Asian Perspectives Seminar of the
Asia Foundation,
http://www.asiafoundation.org/pdf/economic_2year
s.pdf
(2) Lucas et al. (2007) Collateralized debt obligations
and credit risk transfer, Yale ICF Working paper
No. 07-06
(3) Standard and Poor Criteria for rating synthetic CDO
transactions/Credit derivative criteria, 2003-09-02
(4) Philippe Jorion (1999) Risk management lessons
from Long-Term Capital Management,
http://ssrn.com/abstract=169449
Operational risks: Brand, reputation, personnel, and
systems risks
Case study: Global climate change and BP
Textbooks:
Supplemental readings:
(1) Dunnett et al. (February 2005) Managing
operational risk in banking, McKinsey Quarterly
(2) The Kerviel Affair – Progress report of the Special
Committee of the Board of Directors of Societe
Generale, February 20, 2008
(3) The Kerviel Affair - Report of the Board of Directors
to the general shareholders meeting of Societe
Generale, May 22, 2008
2008 Yearbook: Credit enhancements, p.103
Project Finance: Going beyond financial
considerations
Case study: Nghe An Tate, HBP #202054
Ch. 6 and Project Finance documentation
Public Private Partnerships in Project Finance
Case study: Sydney Cross City Tunnel, HBP 9-HKU691
Ch. 14, 18
2008 Yearbook: The anatomy of construction risk, p.
13
April 13
April 20
April 27
Socializing risk: Pensions, social security,
healthcare, and assorted others
Case study: Risk at Freddie Mac
Textbooks: H&N – Ch. 16, 17, 19
Emerging risks: What’s next?
Religion and Project Finance
Case study: The International Investor, HBP #200012
Note on Islamic finance, HBP #200002
Emerging risks, emerging countries, and emerging
issues in Project Finance
Case study: Chad-Cameroon Petroleum
Development (A), (B), (C), and (D), HBP #202010,
#202012, #206129, and 207087
Case study: Security Breach at TJX
Textbooks:
Supplemental readings:
(1)
Jon
Collins
(2008)
New
technology brings new risks, Computing 24 April Special topics including bankruptcy, Foreign Corrupt
2008
Practices Act, dispute resolution, and merchant
(2)
GreenFacts Website, Risk of facilities
new technologies
The tie that binds: Enterprise Risk Management
Beyond ERM: Global risk management in Project
Finance
Case Study: Enterprise risk management at Hydro One
Case study: In addition to the Hydro One case,
Textbooks: H&N – Ch. 27
Qezon, HBA #799057 and Exxon/Mobil and the
Chad/Cameroon Pipeline, HBP #UV0100
Cases from Harvard Business Publishing:
Petrolera Zuata, Petrozuata C.A., #299012
Boeing 787: The Dreamliner, #305101
White nights and polar lights: Investing in the Russian oil industry, #795022
The pharmaceutical industry: Challenges in the New Century #9-703-489
The competitive advantage of Russia, #9-IB7-3
New Century Financial Corporation, #9-109-034
Nephila: Innovation in catastrophe risk insurance, #9-206-130
OSG Corporation: Hedging transaction exposure, #HKU618
Global climate change and BP, #9-708-026
Risk at Freddie Mac, #F-270
Security breach at TJX, #908E03
Enterprise risk management at Hydro One, #9-109-001
Cases from Darden Business Publishing:
New Leaders of financial giants: The cases of Vikram Pandit (Citi) and John Thain (Merrill Lynch), # UVA-F-1551
Risk exposure and risk management at Korea First Bank, #UVA-F-1386
PERSONAL PROFILE
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BACKGROUND
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