RMI2302 EXAM 3 REVIEW 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 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 All about risk reward 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 Labor efforts of mind and muscle that can be used in production process Capital all nonhuman ingredients that go into production 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 Increases in GDP can be from production increases or price increases 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 of the Labor Force Quality 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 of components CHARACTERIZED BY Modest tipping points combining indirectly to produce large failures Risk sharing on contagion as one loss triggers a chain of others hysteresis or a systems being unable to recover equilibrium after a shock 31 GLOBAL RISKS DIVIDED INTO 5 CATEGORIES Economic Environmental Geopolitical Societal Technological RISKS ANALYZED ALONG 3 PARAMETERS Highest concern qualitative Likelihood and impact quantitative Interdependencies systemic TOP 10 HIGHEST CONCERNS 1 Fiscal Crisis in Key Economies 2 Structurally High Unemployment Underemployment 3 Water Crisis 4 Severe Income Disparity 5 Failure of Climate Change Mitigation and Adaptation 6 Greater Incidence of Extreme Weather Events 7 Global Governance Crisis 8 Food Crisis 9 Failure of a Major Financial Mechanism Institution 10 Profound Political and Societal Instability CAUSES OF FISCAL CRISIS Lack of confidence High level of government debt WATER CRISIS 3 Connected to extreme weather Water security Impact of food availability and prices Not just third world countries CA FL CLIMATE CHANGE 5 Economic Growth vs Climate Change Vulnerability Cost Time OTHER RISKS Urbanization Existential threats TRENDS TO WATCH Demographic trends aging Societal Concerns extremism youth underemployments gender inequities Technological privacy mismanagement Environment fracking Science and Technology 3D printing self drive vehicles Economic monetary policy Social And Political cost of living longer 3 SPECIFIC RISKS OF FOCI Geopolitical Low level conflicts Sectors 1 Energy 2 Financial services 3 Healthcare Youth Cyber Risk Education and unemployment Supporting older generations Professional vs formal education Education vs training Youth politics and dissatisfaction Smart grid Cyber warfare Global Navigation Satellite Systems Disruptive Technologies Snowden Identify Risk Prioritize Top Risks Undertake Risk Assessment Identify Risk Management Options Design Risk Management Strategy Implement Monitor STRATEGY FOR MANAGING GLOBAL RISKS RISK MANAGEMENT PROCESS MODULE 12 NATURAL HAZARDS If a tree falls in a forest If a hurricane makes landfall But there are no humans there to experience it what is it NATURAL DISASTERS A combination of fatalities damage economic effects NATURAL DISASTERS vs GREAT NATURAL DISASTER Death toll damage effect on economy Not a clear definition hard to bring precision to natural events RECENT NATURAL DISASTERS Human vs Geological Timeframes Typhoon Haiyan Earthquakes Tsunami Earthquake Haiti 1918 Flu GREGORY VAN DER VINK STUDY Deaths from natural disasters can no longer be dismissed as random acts of nature They are direct and inevitable consequences of high risk land use and failures of government to adapt or respond to such known risks Real estate location location location Economic development and population Q Who is more likely to be effected by a disaster Pour countries Dictatorship HUMAN RESPONSE TO DISASTERS People tend to be altruistic in times of emergency Creates incentives in non emergency times ECONOMIC LOSSES 35 of top 40 losses US Japan Europe Infrastructure Role of insurance in economic development Insured losses only a portion of economic losses ANALYZING NATURAL HAZARD RISK Probability Frequency Earthquakes will happen Return
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