RMI2302 EXAM 3 REVIEW MODULE 9 STRATEGY Makes companies more competitive alert to their circumstances STRATEGIC RISK Mistakes in strategy can be severe FINANCIAL CRISIS Global A failure of Risk Management Strategy and the lack of played a large role Strategic risk played a role but not a primary driver of the global and resilient finance crisis CORPORATE STRATEGY What is my ultimate goal purpose and strategy both short term and long term ROLE IN THE FINANCIAL CRISIS How does our mortgage system work Fannie Mae Freddie Mac Government sponsored secondary mortgage markets Conforming mortgage Credit Default Swap The most banks will lend is 80 of value MBS Mortgage Backed Security were actually Risky Mortgage Securitization Financial institutes that didn t have a long term strategy DID STRATEGY CAUSE THE CRISIS Probably not but did not avert it Did not check qualification of those applying for mortgage Strategy did point to shock price as the only measure of success Companies were sacrificing long term strategy for more faddish concerns and short term profits IS THERE A PROBLEM WITH STRATEGY Competitive advantage time shortened Position volatility of leaders Need for adaptive strategy Create a set of Optimal conditions continuous emergence of superior strategies STRATEGY NEEDS TO INCORPORTATE Risk Boundaries Corporate purpose Environment SYSTEMIC RISK is real Interrelation causes systemic risk Highest today that its ever been There is a trade off between efficiency and redundancy excess capacity CORPORATE PURPOSE Stability Growth Employees SHAREHOLDER VALUE a result not a strategy STRATEGIC BOUNDARIES must be defined by strategy STRATEGIC ENVIRONMENT Sustainable growth Demographic Trends Consumption Trends SUPPLY CHAIN A system of organizations people activities information and resources involved in moving a product or service from supplier to customer SUPPLY CHAIN RISK Anything that can interrupt the ultimate product delivery anywhere along the supply chain USING HISTORICAL DATA TO ESTIMATE FREQUENCY AND SEVERITY OF FUTURE LOSSES Works well for common supply chain problems Poor supplier performance Forecast errors Transportation breakdowns Doesn t do well for low probability high impact events Hurricane Katrina Superstorm Sandy SARS outbreak AUTHORS PURPOSE Ignore the cause of disruption to the supplier Develop a model that focuses on time to recovery of the supplier and our exposure to that supplier risk exposure index METHODICAL APPROACH Doesn t forget about small low cost commodity suppliers which can have a large impact BENEFITS top 4 important 1 Identifies hidden exposures 2 Avoids the needs for predictions about rare events 3 Reveals supply chain dependencies and bottlenecks 4 Promotes discussion and learning 5 Allows for more focused risk management 6 Many key suppliers are properly managed 7 Many small suppliers often overlooked prior to this type of analysis TIME TO RECOVER the time it takes for a particular node to be restored to full functionality after a disruption ACCOUNTS FOR existing alternative sources of supply transportation inventory work in progress and production dependencies BENEFITS Identifies hidden exposures Avoids the need for predictions about rare events Reveals supply chain dependencies and bottlenecks TWO DEMENSIONS supplier node Total amount of money that the company spends at each The performance impact on the firm associated wit a disruption of each supplier node MODULE 10A DERIVATIVE A contract between two or more parties whose value is based on an agreed upon underlying financial asset index or security COMMON DERIVATIVEs Future contracts value affected by the performance of the underlying contract Forward contracts Options Swaps Warrants DERIVATIVE HEDGING Allows you to get rid of price risk by setting a price to sell product in the future The value of the contract is unknown This does not create risk DERIVATIVES USED TO SPECULATE Sell it now high and buy it again later low If prices are predicted to go down I make money If prices go up I lose money Creates risk by taking on exposure that I have never had RISKS OF DERIVATIVES since many trades are unregulated there is little oversight to see how risky some of the positions that are being take by individuals or organizations are WHY USE DERIVATIVES Legitimate hedging function risk management tool Amplify Leverage returns both good and bad WHAT DON T WE KNOW ABOUT DERIVATIVES What is the exposure How bid is the actual market DERIVATIVES Derivatives derive their value from other assets and are derivatives YES are financial instruments that allow investors to speculate on the future price of an asset NO DERIVATIVES Recent market failures were due to mismanagement of the derivative investments Widespread regulation should be instated or do not use them at all Warren Buffet financial weapons of mass destruction No one knows how big the market is in derivatives MODULE 10B INSATIABLE WANTS our wants and desires spur economic activity NEEDS food water shelter clothing WANTS entertainment communication variety brownies unlimited LIMITED MEANS Resources are scarce Technology known means and methods available for combining resources to produce goods and services Labor and Capital GDP Gross Domestic Product Primary measure of production Total value of production using market prices Doesn t take into account ownership GDP as the economic pie Doesn t tell us what is produced PRODUCTION POSSIBILITIES Every economy has a stock of resources labor and capital and technology to produce Combinations virtually limitless If only two products Can be represented by the production possibility curve GENETIC GROWTH The pie gets bigger new resources new technology etc WHAT CAUSES POVERTY SPECIFIC GROWTH Education technology food technology Quality of the Labor Force Stock of capital capital accumulation Technology Efficiency Population WHAT CAN GOVERNMENT DO LESS DEVELOPED COUNTRIES Communism vs Capitalism Planned vs Unplanned economy Attract FDI Involvement in education Infrastructure DEVELOPED COUNTRIES Humanitarian aid World bank loans Partnership cooperation Outsourcing MODULE 11 UNDERLYING THEMES IN GLOBAL RISKS REPORT Trust Long term thinking Collaborative multi stakeholder action Global governance GLOBAL RISK Occurance that causes significant negative impact for several countries and industries over a time frame of up to 10 years SYSTEMIC RISK Breakdowns in an entire system as opposed to breakdowns in individual parts
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