MODULE 10 Financial Risk Derivative 10 A Contract between two or more parties with an agreed upon value based on a financial asset index or security o Common types include future contracts forward contracts o Something that takes its value from something else Bass definition How are derivatives used o As a hedge Hedge price risk Know you will need something in future do not know what price will be get into a contract that specifies price Airline example in 10A PowerPoint o To speculate How they derivatives derive value o According to Yong Chen from other assets Derivative risk o Trades are highly unregulated which makes it hard to see the risky positions taken by individuals or organizations o Derivatives are financial weapons of mass destruction Warren Buffet o Ex Lehman Brothers lost money due to using derivatives Pros of derivatives o Hedging function Risk management tool o Amplify leverage Help make money move faster work harder Use money to make derivative contracts essentially making more money rather than having money sitting in savings earning little to no interest Cons about derivatives o Size of derivative market is unsure Exposure is unknown because it is unregulated How derivatives should be regulated o Speculators help make markets work o Derivatives are very complex Very difficult to regulate effectively They are a global product who should regulate Economic Reasoning 10B World Poverty Economics Our Insatiable Wants o Our wants desires spur economic activity o Needs food water shelter o Wants entertainment travel unlimited Limited means o Resources are scarce o Technology Resources cannot be increased greatly at any time Factor to limited degrees of improvement Technology known means methods available for combining resources to produce goods and services Labor efforts of mind muscle used in production process Capital nonhuman ingredients that go into production o Labor capital Measure production o GDP Measure total value of production with market prices Nicknamed economic pie We do not know how the pie is split up Ways to increase GDP Increase production Increase prices Does not take into account ownership Toyota Japanese company gets profit but built here o Counted in our GDP Production Possibilities o Every economy has resources labor capital and technology to How they are combined to produce is virtually limitless Can Government use GDP to measure well being produce o Real GDP Measures if we are producing more Index everything by measure of price indexes o Per capital real GDP Measures if we are using more labor resources Per person basis Poverty o Causes o Quality of labor force Level of education skills o Stocks of capital capital accumulation Capital includes cash natural resources o Lack of technology Ability to use natural resources to produce o Efficiency o Population Productive population long life expectancy Enough people in workforce o Less Developed countries Governments role o Communism vs capitalism Type of government Capitalistic society Open competition Communistic approach Share everything among people Works in theory not practice o Planned vs unplanned economy Planned Unplanned Government decides what s produced Free market supply demand o Involvement in education Educated population government is generally involved in education o Infrastructure Highway system communications power Where to spend money o Attract FDI foreign direct investment o Developed Countries o Governments role in helping less developed countries Humanitarian aid World bank loans Partnerships cooperation s Outsourcing Occurrence risk that can cause significant impact for several countries up MODULE 11 Global Risk Report Global Risk to ten years Categories of Risk Part I 5 categories o Environmental climate change natural catastrophe o Economical o Geopolitical interstate conflict Syria o Societal social instability water crisis o Technological Parameters to analyze risk o Qualitative highest concern Concern is long term or currently happening Currently happening 18 months geopolitical risks Ex Interstate conflict Syria Long term 10 years environmental or societal risks Ex Water Crisis is an ongoing long term concern o Quantitative likelihood impact Frequency severity o Systemic interdependencies Risks that appear on all three radar screens o Highest concern likelihood impact Interstate conflict Weather climate change Water crisis Unemployment underemployment Economic concern o Independent contractor o Competition employers have negotiating power Leads to lower wages Geopolitical Risk Risk of non state actors o Groups of individuals organizations that are not nations but begin to act like nations o Ex ISIS ISIL Taliban in Afghanistan Raises risk of to o Interstate conflict Involves other nations o Weapons of mass destruction o Terrorism o Weakening global governance UN or World Bank have been unable to respond to non state actors which in turns makes them appear weak Economic Risk Asset Bubbles Raises risk of to o Economic stability o Regulatory failures o Assets become overvalued housing bubble No regulation over mortgages led to failure Societal Risk Critical infrastructure failure natural or man made 100 years until poorest countries can adapt as well as we can o Electrical gps supply chain o Ex Natural disasters or terrorist acts Raises risk of to o Economic social stability o Pandemics How things disease spread Environmental Risk Climate change o Vs development Raises risk of to o Impact of Economic social stability Vulnerability who can adapt o Wealthier countries o Poorer countries are more vulnerable o Time today Technological Risk Governing the internet Raises risk of to o Cyber crime o Net neutrality o Internet is resilient unified multiple units Access speed who should have faster better access o Privacy o Freedom of expression Hate speech Cultural differences videos of beheading Risks in Focus Part 2 Interplay between Economics and Geopolitics o Benefits of trade foreign investment Outsourcing Less control causes more supply chain issues o Protectionism in volatile economic conditions Domestic growth production economies o Economic sanctions Iran Iraq Russia Locally U S economic sanctions against Cuba o All put stress on Global Governance Difference of opinions Urbanization in Developing Countries o Planned vs unplanned speed Urban planning o Infrastructure smart cities o Health pandemics o Climate change o Social instability o Risks Overburdening for cities Cause
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