MODULE 10A Risks and Organizations Derivatives What is a derivative o A contract between two or more parties whose value is based on an agreed upon underlying financial asset index or security Common underlying instruments include Bonds commodities currencies interest rates market indexes and stocks Common derivatives Future contracts forward contracts options swaps and warrants Futures contract is an example of a derivative because its value is affected by performance of the underlying contact A stock option is also a derivative because its value is derived from that of the underlying stock 1 Derivatives can be used as a hedge Airline example You know you re going to need 10 million barrels of aviation fuels for a year you would enter into a futures contracts to purchase the fuel at a specified price Not depending on market prices supply and demand Now I have hedged my exposure to fuel price risk 2 They can be used to speculate How to use them to make money you suspect the S P index is going to go down enter into the derivative transaction where you sell the index at today prices in the S P If you don t actually own shares to sell enter into different derivative transaction to buy at lower price Sell high buy low you make money without ever owning any shares of the index o What s the risk Since many trades are unregulated there is little oversight to see how risky some of the positions that are being taken by individuals or organizations are Berkshire Hathaway Warren buffet Derivatives are financial weapons of mass destruction o However company still uses them and lost 67 billion last year off of derivative transactions Lehman Brothers Subprime mortgage crisis 2007 2008 o Went out of business Orange County CA lost over 1B o Bet against interest rate lost over a billion dollar AIG Insurance Company o Derivatives department almost entirely responsible for downfall o Why use them o What don t we know Legitimate hedging function Risk management tool Amplify returns both good and bad Risk reward Make money move faster work harder vs a savings account where interest accumulation is slow No one knows how big the derivative market is because it s unregulated Estimated in 2007 1 144 quadrillion How should they be regulated Shouldn t people be allowed to speculate Speculators often help to make markets work Can they be regulated effectively Derivatives are a global product so who should regulate them Internal supervisors couldn t see the risk how could an external regulator Understand what derivatives are how they generate risk and reward problems with regulating derivatives and specifically risk reward in general o Take aways MODULE 10B Risk Government Alleviating Human Misery World Poverty Economics o Our insatiable wants Our wants and desires spur economic activity Needs food water shelter clothing Wants entertainment communication variety brownies etc o Our limited means Resources scarce What s available to fulfill wants and needs resources don t vary on year to year bases cant be increased in a large quantity Methods available to us for combining our resources to produce good and services we want Technology Labor capital Efforts of our mind and muscle that can be used to produced vs non human resources o The capacity of the economy to produce GDP Primary measure of production total value of production Also referred to as the economic pie Total value of production using market prices Doesn t take into account ownership Doesn t tell us what is produced Production possibilities Every economy has a stock of resources people labor capital and technology to produce How they are combined to produce products services is o Have to determine what will be the most Represented by the Production Possibilities Curve virtually limitless PPC efficient possible o On the curve using resources as efficiently as o Inside the curve not using resources efficiently o Outside the curve not possible given our current resources and technology Economic Growth Pictures from reading in the book IF we can move entire curve outwards economic growth o Capacity to produced has increased pie has gotten bigger due to more resources and new technology Can government use GDP to measure well being Are we producing more o Real GDP Are we using more labor resources o Per capita real GDP Causes of Poverty and Requisites of Economic Growth o Table 1 3 Consists of Less developed o Tend to have larger populations o Lower life expectancy o GDP per capita significantly lower o GDP growing faster Developed o Almost 1 3 of the size of lesser developed countries and growing population rate much lower o Life expectancy in 80 s for all countries except US 79 o GDP per capita significantly higher o Slower growth rates for GDP o Income Distribution Table Even in developed countries the wealthy are getting rich and the poor are getting poorer What s the role of private business What can they do to have an effect on this o Partially an outsourcing issue o What causes poverty 5 things Quality of the labor force Educational skills relevant to production Stocks of Capital Capital Accumulation Includes natural resources cash Combine labor and capital Technology Efficacy Population Sufficient Life expectancy to live long and be productive Can Governments Help o What can Governments Do Less Developed Countries Communism vs Capitalism Planned vs unplanned economy Involvement in education Infrastructure Attract FDI Foreign Direct Investment Developed Countries Humanitarian aid World bank loans Partnerships Cooperation Outsourcing MODULE 11 Global Risks Report 2015 Edition Risk Report o Survey of more than 800 experts o Done over the past 10 years o Orient inform decision makers o Objectives Map 28 global risks Part 1 13 trends driving those risks Part 1 Look at 3 risks in detail Part 2 Discuss managing these risks Part 3 What is Global Risk o Global Risk Occurrence that causes significant negative impact for several countries and industries over a time frame of up to 10 years o 28 global risks Table A divided into 5 categories into 5 categories 1 Economics 2 Environmental 3 Geopolitical 4 Societal 5 Technological Part 1 Risk Analysis o Risks analyzed among 3 parameters Highest concern qualitative Figure 1 1 Is it more concerning in the next 18 months Geopolitical or in 10 years environmental and societal Short term vs long term Based off feelings of experts Likelihood and impact quantitative Figure 1 Frequency severity How often are they going
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