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Seminar: Financial Risk Management: A Brief Overview

Date: 14th January, 2011

Speaker: Dr. Puneet Prakash

About the speaker:

Dr. Puneet Prakash is an Assistant professor at Virginia Commonwealth University since 2005. He holds a Ph.D in Risk Management and Insurance from Georgia State University, an MBA from IIFT, Delhi, PG Diploma in Development Policy (IGIDR), and M.Sc. (5-year Integrated) from IIT, Kanpur. He is also a visiting faculty to IIT Kanpur, Fall 2009.

Abstract of the talk:
The seminar started with a brief discussion on market and the categorization of market participants into risk averse, risk neutral and risk seeking behaviors. Dr. Prakash then proceeded to discuss the Modigliani – Miller theorem that Corporations are risk neutral and that if investors want to manage risk they could do it as an individual rather than through the company. The underlying assumption is that a company and a individual have the same capability to manage risk. As this assumption is not a universal truth, not all corporations are risk neutral. Any discussion on risk management invariably involves Jensen’s inequality and this seminar was no exception to this. Dr. Prakash explained in brief Jensen’s inequality for the benefit of the audience which had some undergraduates apart from the usual MBA students.

The concepts of hedging the risk, risk premium and insurance were then dealt with. Dr. Prakash then proceeded to answer when corporations manage risk and their value functions. He also touched upon locating the expected bankruptcy point and expected bankruptcy costs. To ensure that the mixed audience carried his point home he interspersed theory with real life experiences, examples and analogies. Dr. Prakash then explained what is known as integrated risk management. He then mentioned the categorization of risk into operational (business) and financial. The fundamental generic risk management matrix was next on his agenda. This was followed by a small brief on how to practice ERM (Enterprise Risk Management) and what are the origins of financial risk.

The process of financial risk management was then taken up. Dr. Prakash then described various properties of risk viz. coherence, monotonicity positive homogeneity and sub-additivity. He then went on to elaborate on how to compute value at risk given the distribution of return. What followed this macro level discussion was a micro level mathematical model for financial risk management. Financial risk was broken down into market risk, default/credit risk, interest rate risk and liquidity risk. He then discussed generalized extreme value distribution (Fetcher Distribution) which is also known as limit theorem for extreme values) an then he explained how short selling could take a firm from inefficient to efficient part of risk return curve. The informative two hour talk concluded with capital asset pricing model.

Prepared By:
Atul Mishra(matul@iitk.ac.in)

Published By:
PR & Media Cell, MBA-IIT Kanpur (prmba@iitk.ac.in)

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