Rick Nason - Essentials of Financial Risk Management: Practical Concepts for the General Manager

Essentials of Financial
Risk Management

Essentials of Financial
Risk Management

Practical Concepts for the
General Manager

Rick Nason
Brendan Chard

Essentials of Financial Risk Management: Practical Concepts for the General Manager

Copyright Business Expert Press, LLC, 2018

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any meanselectronic, mechanical, photocopy, recording, or any other except for brief quotations, not to exceed 250 words, without the prior permission of the publisher.

First published in 2018 by

Business Expert Press, LLC

222 East 46th Street, New York, NY 10017

www.businessexpertpress.com

ISBN-13: 978-1-94709-838-1 (paperback)

ISBN-13: 978-1-94709-839-8 (e-book)

Business Expert Press Finance and Financial Management Collection

Collection ISSN: 2331-0049 (print)

Collection ISSN: 2331-0057 (electronic)

Cover and interior design by S4Carlisle Publishing Services Private Ltd., Chennai, India

First edition: 2018

10 9 8 7 6 5 4 3 2 1

Printed in the United States of America.

Abstract

Financial risk management is a growing field of specialization in business. With the increased level of regulation and emphasis on financial reporting, the role of the financial risk manager has never been more prominent. This book covers the concepts, tools, and techniques of financial risk management in a comprehensive, yet easy-to-understand manner. Avoiding academic jargon wherever possible, the book has as its objective to be a rigorous, yet practical guide to financial risk management.

This book is intended for senior managers, directors, risk managers, students of risk management, and all others who need to be concerned about financial risk management or who are interested in learning more about this growing career path.

Keywords

decision making, enterprise risk management, financial risk management, hedging, regulation, risk management, risk mitigation, strategic analysis

Contents

We have both been very fortunate to have worked in risk management with many very talented people. To them we owe a debt of gratitude for our risk management educations as well as helping each of us to develop a passion for risk management.

We would also like to thank our respective families for their understanding and patience as we spent many an hour away from them in order to complete this book.

Why a New Book on Financial Risk Management?

There are lots of books on financial risk managementwhy the need for this one? It is a very fair question. The reason we are writing this book is that we believe there is a need for a book on financial risk management for the rest of us; those of us who are not quantitative geeks, those of us who do not want to wade through a large number of formulas, those of us who do not want to deal with abstractions that take away from the real-world applicability of much of the world of risk management. In other words, a concise, yet thorough book on what one needs to know to be effective (rather than just knowledgeable) about risk management.

Financial risk management is managing the volatility and uncertainty of financial prices. In our ever-increasingly connected and global business landscape, managing the financial risks of a firm is more important than ever and perhaps more difficult to do properly. The good news is that there are lots of tools, tactics, and techniques for doing so. The not-so-good news is that many of these techniques are being developed for the quantitatively inclined, rather than for the practical business manager. This is the gap that this book aims to narrow significantly by providing a no-nonsense guide to the essentials of financial risk management.

Financial risk management has been an important aspect of corporate management probably since financial transactions replaced bartering as a mechanism for trade. There is evidence that early form of derivative contracts existed in biblical times, and in more or less continuous use since then. Financial risk management has continued to evolve, but a modern transformation took place when Fischer Black, Myron Scholes, and Robert Merton developed the Black-Scholes Merton option pricing model in the 1970s. Financial risk management exploded into the public conscience for all the wrong reasons as derivative debacles of the late 1990s led famed investor Warren Buffet to call derivatives weapons of financial mass destruction. Of course, derivatives, or more specifically Collateralized Debt Obligations and Credit Derivatives, again became front page buzz words during the financial crisis of 2008 as risk management techniques again seemingly not only failed but backfired.

This is, however, not a book about financial derivativesalthough derivatives and derivative concepts frequently do play a role in financial risk management. This book is a common-sense approach for managing the day-to-day financial risks that come about from operating in our ever-increasingly connected and global world. At a time when focus on implementing a competitive strategy is as important as ever, no firm is safe from having their well-thought-out plans derailed by unexpected volatility in financial prices. Failure to properly manage financial risks generally leads to failure or at least a damaged reputation of the managers and the directors. That being so, it is incumbent upon managers and directors to have a firm grasp of risk management principles and to effectively develop and implement an appropriate risk management strategy.

The aim of this book is to cut through the clutter and get to the essence of best practices in financial risk management. It is a book based in theory but focused on practice and being practical in its approach. It is a book for those who need to practice financial risk management, rather than theorize about financial risk management. It is not a Dummies book. It is a book for the intelligent and thoughtful manager who wants to as efficiently as possible gain the financial risk management knowledge and know-how necessary so they can get on to their foremost job of managing their department or even the firm.

Who This Book Is Intended For

This book is first and foremost for practitioners. It is intended for those managers who understand the importance of financial risk management for the achievement of their goals. While the manager may not actually be implementing the financial risk management tactics themselves, they realize the importance of knowledge of the principles so they can intelligently integrate their operational strategies with the financial risk management strategy. Knowledge of risk management strategies allows one to implement strategies with a higher degree of confidence with a lower probability of derailment due to unforeseen financial events.

The book is also a useful primer for the general manager who wants to expand their skill set. Financial risk management knowledge is increasingly necessary for senior managers. If one aspires to senior management, then financial risk management is a key piece of the skill and knowledge set needed.

The original impetus for this book was the increasing demand for training for Boards of Directors that we encountered. Financial risk management expertise is not a nice-to-have feature, but instead it is a necessity for Board members. In recognition of this, on Risk Governance has a section dedicated to the specific issues that Board members need to pay attention to.