FNCE30002 Lecture Notes - Lecture 11: Opportunity Cost, European Cooperation In Science And Technology, Capital Market
Document Summary
Ideally, it removes bad outcomes from distribution of outcomes that could occur, without affecting good outcomes. In a perfectly competitive market it should cost 1. 5 to purchase insurance to rid risk: hence, npv of risk management will be 0 subtract. Deals with how financial contracts may be used to reduce business risk: derivatives (asset class) are use useful for risk management, called derivatives because their value is derived from another asset (e. g. ) forwards, futures, options and swaps. Portfolio of forward contracts with a single price for forward execution. Firms face various types of risk: market and credit (e. g. ) systematic risk, operational risks (e. g. ) risk of fraud, currency risks for multinationals, political instability (e. g. ) political risk. Under m&m world perfect capital market conditions risk management does not affect firm value: however, because of capital market imperfects, it can affect value of firm. Objective for risk management undertake activities that align risk exposure of firm to risk appetite of shareholders.
