Strategic Risk Management Practice: How to Deal Effectively with Major Corporate Exposures

by Torben Juul Andersen , Peter Winther Schrøder

• ISBN13: 9780521132152
• ISBN10: 0521132150
• Edition: 1st
• Format: Paperback
• Copyright: 2010-04-12
• Publisher: Cambridge University Press

Summary

At a time when corporate scandals and major financial failures dominate newspaper headlines, the importance of good risk management practices has never been more obvious. The absence or mismanagement of such practices can have devastating effects on exposed organizations and the wider economy (Barings Bank, Enron, Lehmann Brothers, Northern Rock, to name but a few). Today's organizations and corporate leaders must learn the lessons of such failures by developing practices to deal effectively with risk. This book is an important step towards this end. Written from a European perspective, it brings together ideas, concepts and practices developed in various risk markets and academic fields to provide a much-needed overview of different approaches to risk management. It critiques prevailing enterprise risk management frameworks (ERMs) and proposes a suitable alternative. Combining academic rigour and practical experience, this is an important resource for graduate students and professionals concerned with strategic risk management.

Author Biography

Torben Juul Andersen is Professor at the Copenhagen Business School. He has taught financial economics and strategy at George Mason University and Johns Hopkins University. He previously held positions as Senior Consultant at PHB Hagler Baily, Arlington; Senior Vice President at Unibank A/S; Managing Director at SDS Securities A/S, Copenhagen; and Vice President at Citibank/Citicorp Investment Bank, London. He is the author of numerous articles and books on strategy and risk management, including Global Derivatives (2005) and Currency and Interest Rate Hedging (1993). Peter Winther Schrder is a director at Saxo Bank A/S, Copenhagen where he is responsible for all risk management within the group. He has held various executive risk management positions in the banking, insurance and management services industries over the past twenty years where he gained comprehensive practical experience in all aspects of financial and operational risk management. He is also a part-time associate professor at the Copenhagen Business School.

Table of Contents

List of abbreviations	p. viii
List of figures	p. x
List of tables	p. xiii
List of boxes	p. xiv
Preface	p. xvii
The strategic nature of corporate risk management	p. 1
The nature of risk management	p. 1
The significance of potential risk effects	p. 2
Different approaches to risk management	p. 11
Integrating risk management approaches	p. 15
Does risk management pay?	p. 16
Effective risk management	p. 21
Conclusion	p. 30
Economic exposures in corporate risk management	p. 33
Exposures to market risk	p. 33
Economic exposures	p. 35
Foreign exchange rate exposures	p. 38
Interest rate exposures	p. 40
Interacting effects of market-related risks	p. 45
Managing complex market exposures	p. 46
Conclusion	p. 51
Managing market-related business exposures	p. 53
Market-related risk exposures	p. 53
Various hedging possibilities	p. 54
The insurance market	p. 54
Derivative instruments	p. 60
Capital market instruments	p. 69
Coordinating risk management approaches	p. 73
Conclusion	p. 74
Extending the risk management perspective	p. 76
Risk management in all of its aspects	p. 76
An extended view on risk exposures	p. 78
Real options and strategic exposures	p. 85
Real options frameworks	p. 88
Application of the real options logic: managing innovation in the pharmaceutical industry (external venturing)	p. 92
Extending the real options perspective	p. 95
Conclusion	p. 96
Integrative risk management perspectives	p. 99
The need to look across risks	p. 99
Shortcomings of traditional hedging practices	p. 109
An integrative approach to other types of risk	p. 112
Managing the different images of risk	p. 115
Conclusion	p. 118
Current risk management practice and the rise of ERM	p. 120
Drivers of the new risk paradigm	p. 120
Risk management practices	p. 123
ERM - the new risk paradigm	p. 128
Limitations of the ERM framework	p. 138
Conclusion	p. 143
Strategic risk analyses	p. 146
Environmental scanning in a predictable world	p. 146
Scenario planning - a simple technique in an unpredictable world	p. 159
Adding complexity and uncertainty	p. 167
Dealing with the unknown	p. 169
Handling the different images of risk	p. 173
Conclusion	p. 175
Strategic risk management - amendments to the ERM framework	p. 178
The relationship to corporate strategy	p. 178
Organizational aspects	p. 180
Organizational involvement and cultural aspects	p. 187
Conclusion	p. 198
Strategic risk management	p. 200
Organizing the risk management activities	p. 200
The integrative strategic risk management process	p. 202
Organizational structure and risk management	p. 211
Risk management at If P&C Insurance	p. 215
Conclusion	p. 223
Postscriptum	p. 225
Appendices
A strategic responsiveness model	p. 233
Determining the premium on a call option	p. 235
Determining the value of a real option	p. 237
Index	p. 239
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