about finance

risk taking in finance

Fri, 21 Nov 2008 15:49:12 +0100

helllllllllllllllllllllloooooooooooooooooooo

After 3weeks of working hard to take IBT exam I`m really happy to say hello everybody, just have been waiting for the result of my exam look for a great grade.

In this post you will read some information about Risk. How much interesting is this field of Finance, of course I have this course last year at university but unfortunately I did not have this kind of info there , just a little about revenue and return and some formulas to count them. Now I hope you can get quite enough information about an important topic in Finance.

Financial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularly Credit risk and market risk. Other types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks, etc. Similar to general risk management, financial risk management requires identifying its sources, measuring it, and plans to address them. As a specialization of risk management, financial risk management focuses on when and how to hedge using financial instruments to manage costly exposures to risk.

To manage risk, you first have to understand the risks that you are exposed to.

This process of developing a risk profile thus requires an examination of both the

immediate risks from competition and product market changes as well as the more indirect effects of macro economic forces.

Every business faces risks and the first step in managing risk is making an

inventory of the risks that you face and getting a measure of the exposure to each risk.

Assume that you run a small business , you work with some mines in Iran exporting their stone to china and sell some of the stones in Iran.

In the process you are approached to a multitude of risks, first the risk of political turmoil in Iran or China that compound by the volatility in the exchange rate. Another risk may be that your colleagues in mines in Iran exposed to some problems such as labor scarcity or some natural happening like an earth quake and many other risks which can your business down.

However in all the situations above you have to do the best to reduce the risks in your firm or company. Now a days many innovations can help you to do the work.

At first obviously you need to have some numbers and parameters in this field, now you can feel that how hard it can be to convert a quality to quantity. Just think about it , you want to convert the risks above to some numbers which helps you solve the problems of having huge risks.

HOW WOULD YOU DO THIS???

It is one of the most important works a economist do by the base of mathematics, if you are a economist or student in economics field you can get the words I say.

Over the last three decades, the capital asset pricing model has occupied a central and often controversial place in most corporate finance analysts’ tool chests. The model requires three inputs to compute expected returns – a riskfree rate, a beta for an asset and an expected risk premium for the market portfolio (over and above the riskfree rate).Betas are estimated, by most practitioners, by regressing returns on an asset against a stock index, with the slope of the regression being the beta of the asset.

Alpha, beta, and R-squared are components of Modern Portfolio Theory (MPT), which is a standard financial and academic method for assessing the risk of a fund, relative to a benchmark. A mutual fund's alpha and beta are calculated in relation to a market index. Each fund is linked to an appropriate index based on its investment category.

Alpha: A measure of selection risk (also known as residual risk) of a mutual fund in relation to the market. A positive alpha is the extra return awarded to the investor for taking a risk, instead of accepting the market return. For example, an alpha of 0.4 means the fund outperformed the market-based return estimate by 0.4%. An alpha of -0.6 means a fund's monthly return was 0.6% less than would have been predicted from the change in the market alone.

Beta: The measure of a fund's or stock's risk in relation to the market. A beta of A% means the fund's total return is likely to move up or down A% of the market change; 1.3 means total return is likely to move up or down 30% more than the market. Beta is referred to as an index of the systematic risk due to general market conditions that cannot be diversified away.

· R-Squared: R-squared ranges from 0 to 100 and reflects the percentage of a fund's movements that are explained by movements in its benchmark index. An R-squared of 100 means that all movements of a fund are completely explained by movements in the index.
Conversely, a low R-squared indicates that very few of the fund's movements are explained by movements in its benchmark index. Thus, R-squared can be used to determine the significance of a particular beta or alpha (the higher the R-squared, the more significant alpha and beta).

Standard Deviation: Standard deviation is a statistical measure of the range of a fund's performance, and is reported as an annual number. When a fund has a high standard deviation, its range of performance has been very wide, indicating that there is a greater potential for volatility.

· Sharpe Ratio: A measure of a fund's excess return relative to the total variability of the fund's holdings. The higher the Sharpe ratio, the better the fund's historical risk-adjusted performance.

· Treynor Ratio: A measure of the excess return per unit of risk, where excess return is defined as the difference between the portfolio's return and the risk-free rate of return over the same evaluation period and where the unit of risk is the portfolio's beta.

Morningstar Risk
The fund's performance is examined for the past 36 months. Any months in which the portfolio's returns were less than those of the 90-day Treasury bill are flagged.

Morningstar then adds up the amounts by which the fund trailed the T-bill return and divides the figure by 36, to generate an average monthly underperformance.

Morningstar does the same for the rating group as a whole, and divides the fund's underperformance by the group's underperformance to arrive at a Morningstar Risk score.

To assign ratings, Morningstar subtracts each fund's Morningstar Risk score from its Morningstar Return score. The funds in each rating group are then ranked by this raw number, from highest to lowest. The top 10% of funds receive 5 stars, the next 22.5% receive 4 stars, the middle 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. (There is no "zero" star rating—funds with less than 36 months of return data are simply not rated.)

It can be enough in this post for the next post I am going to prepare some information about estimating risk parameters, hedging and….

References:

RISK MANAGEMENT: PROFILING AND HEDGING (Damodaran , Aswath)

http://help.yahoo.com/l/us/yahoo/finance/mutual/funds-06.html

Hope you nice moments

Leila Aghabarari

Comments

huge amount of information

Wed, 10 Sep 2008 16:36:21 +0200

At first thank you because of all these sites, books and weblogs.

this is the sign of development I think with it`s good and bad points, that you can find this datas by searching in just few days.

I think nowadays ,the most important thing to do for having a good and complete source is to gathering information in a right way...

These days I had searched in internet for the topic i`m going to write about in the next post which is risk management in finance, and I found it really hard to select some informations between these huge amount of information in our online world.

Really interesting and admirable...

And the second thing is that , during these weeks I`m working on my professor`s book about international finance and after all these works on it I understood that writing and preapering a book is a awfully hard work.
So I need to be thankful from all the poeple working this much hard for improving our world.
Hope to be one of theme
and thank you for the comment from Hami , i`m waiting for your comments and addresses to make this weblog useful for all who are interested in Finance.

Leila aghabarari

Comments

risk taking in finance

Sun, 17 Aug 2008 18:40:18 +0200

hi every body
really nice to write again after 2weeks, having some busy hours.

for the next post this week, i`m going to have some topics about risk and risk management in finance, which is i think one of the mopst important part of finance courses around the world.

hope to have your ideas or good links...

regards

Comments

innovations in finance

Wed, 30 Jul 2008 14:49:58 +0200

Hello

These two weeks, I read 3 different papers about innovations in finance.
One big question is that, why did these innovations take place in last decades?

The answer is:
The surge in inflation in the late seventies and the concurrent increase in the volatility of interest rates created the first wave of innovation in debt securities, with floating rate debt becoming a viable choice for most borrowers.

Debt / equality securities:

Debt positive points: Tax advantage.
Debt negative points: greater risk of bankruptcy for the firm (because the obligation to make fixed payment remains even when there is no earning for the firm).

Here I think it is useful to know about the optimal debt ratio:

Optimal debt ratio → where the net difference between the tax benefits and the expected bankruptcy cost is maximized:

Debt ratio = pv of tax benefits - pv of expected bankruptcy costs

Value of levered firm = value of unlevered firm + debt ratio

For being secure we can reduce the expected bankruptcy cost and increase both the optimal debt ration for a firm and the total firm value at special leverage by considering on borrowing money on a security where interest payments are not fixed but vary as earnings vary.

Now by looking at these figures we will understand it better:

This figure provides the time series of firm value for a hypothetical firm, where all of the changes in firm value are assumed to occur as a result of changes in macro economic variables:

In this figure we can see that where value of debt is fixed but value of firm is changeable by macroeconomic situations there is a risk for being bankruptcy when firm value is less than value of debt.
And as we know the situation outlined above is not really improbable for firms.

In this figure you can see that value of debt is changing by macroeconomic variables, so since debt value and firm value move together here the possibility of bankruptcy is reducing.

Now it is more clear for us that why did financial innovations take place in the last decades…

Some of the most important innovations which is used now a days are as follows:

.Commodity bond : where the coupon payments on the bond are linked to the price of a specific commodity, such as gold or oil.
.Catastrophe bond : where coupon payments and principal payments can be reduced or suspended in the event of a specified catastrophe (such as an earthquake or a flood).
….

Finally I found this chart from a site which is mentioned bellow in references:

have a nice time

References:
. Aswath Damodaran, Financial innovations and capital structure choices, stern school of buisiness, New York city.
. Franklin, innovations in finance

Comments

title-4457504

Wed, 16 Jul 2008 20:36:30 +0200

Hi everybody

since I try to keep the blog updated ,then I found it really interesting to think and study everyday about it. I study at least one or more papers every day and try to release the components of finance in those papers then choose the best form of papers and the way of thinking which is really appropriate for this blog.

Fortunately, these days I keep trying to find some good subjects for a book is written by one of my professors in University of Tehran.

For the next topic I want to search about innovations in finance.
Good topic I think ……………

Comments

title-4435820

Fri, 11 Jul 2008 20:08:38 +0200

WHAT IS CORPORATE FINANCE EXACTLY?

This was the last question and during these days I searched in the internet about it, and I want to be thankful for these huge amount of information that is in websites about finance and everything about it,
One of the most interesting and completely reliable website about finance, in which you can download many good papers and e-books is the one owned by Dr Adamodar.
In this week I tried to find good websites and papers about finance.

Corporate Finance

Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize corporate value while reducing the firm's financial risks.
The role of a corporation`s management is to increase the value of the firm to its shareholders while observing applicable laws and responsibilities. Corporate finance deals with the strategic financial issues associated with achieving this goal such as how the corporate should raise and manage its capital, what investments the firm should make, what portion of profits should be returned to shareholders in the form of dividends, and whether it makes sense to merge with or acquire another firm.
The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, the short term decisions can be grouped under the heading "Working capital management". This subject deals with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers).
The terms Corporate finance and Corporate financier are also associated with investment banking. The typical role of an investment banker is to evaluate investment projects for a bank to make investment decisions.

Capital investment decisions are long-term corporate finance decisions relating to fixed assets and capital structure. Decisions are based on several inter-related criteria. Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate. These projects must also be financed appropriately. If no such opportunities exist, maximizing shareholder value dictates that management return excess cash to shareholders. Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision.
Management must allocate limited resources between competing opportunities ("projects") in a process known as capital budgeting. Making this capital allocation decision requires estimating the value of each opportunity or project: a function of the size, timing and predictability of future cash flows.

Finally I think it is really helpful to know a little about careers in corporate finance.

Careers in corporate finance:

career in corporate finance means you would work for a company to help it find money to run the business, grow the business, make acquistions, plan for it's financial future and manage any cash on hand. You might work for a large multinational company or a smaller player with high growth prospects. Responsibility can come fast and your problem-solving skills will get put to work quickly in corporate finance.

Jobs in corporate finance are also relatively stable while performance in these jobs count. But it's not like your job is going to depend on whether you're selling enough this week or getting good deals finished this quarter. Rather the key to performing well in corporate finance is to work with a long view of what going to make your company successful. Many would argue that corporate finance jobs are the most desirable in the entire field of finance.
Some of the benefits of working in corporate finance are:
1. You generally work in teams which help you work with people
2. It's alot of fun to tackle business problems that really matter
3. You'll have many opportunities to travel and meet people and
4. The pay in corporate finance is generally quite good.

References:

http://www.careers-in-finance.com/cf.htm
http://www.mckinseyquarterly.com/
http://pages.stern.nyu.edu/
free encyclopedia

Comments

title-4404715

Fri, 04 Jul 2008 20:40:26 +0200

finance defenition

These are the result of searching in the internet for 5 hours:

here is the answers for the question WHAT IS FINANCE?.
May be I can add some info to these texts later to make it more complete?

The field of finance refers to the concepts of time, money and risk and how they are interrelated. The term "finance" may thus incorporate any of the following:
The study of money and other assets;
The management and control of those assets;
Profiling and managing project risks;
The science of managing money;
The industry that delivers financial services
An entity whose income exceeds its expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower, a financial intermediary such as a bank, or buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary pockets the difference.
A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays the interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity. Banks are thus compensators of money flows in space.

So maybe the course Finance and Banking is related to the role of bank as a aggregator and a compensator and all the related subjects.

Finance is one of the most important aspects of business management. Without proper financial planning a new enterprise is unlikely to be successful. Managing money (a liquid asset) is essential to ensure a secure future, both for the individual and an organization.
We can divide Finance into 3 parts:
Personal Finance
Corporate Finance
Public finance

Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporate finance), as well as by a wide variety of organizations including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriate financial instruments, with consideration to their institutional setting.

In each of the parts above some questions about finance is answered;
for example:
Questions in personal finance revolve around
How much money will be needed by an individual (or by a family) at various points in the future?
Where will this money come from (e.g. savings or borrowing)?
How can people protect themselves against unforeseen events in their lives, and risk in financial markets?
How can family assets be best transferred across generations (bequests and inheritance)?
How do taxes (tax subsidies or penalties) affect personal financial decisions?
How does credit affect an individual's financial standing?
How can one plan for a secure financial future in an environment of economic instability?

Personal financial decisions may involve paying for education, financing durable goods such as real estate and cars, buying insurance, e.g. health and property insurance, investing and saving for retirement.
Personal financial decisions may also involve paying for a loan.

Corporate finance:

Managerial or corporate finance is the task of providing the funds for a corporation's activities. For small business, this is referred to as SME finance. It generally involves balancing risk and profitability, while attempting to maximize an entity's wealth and the value of its stock.
Long term funds are provided by ownership equity and long-term credit, often in the form of bonds. The balance between these forms the company's capital structure. Short-term funding or working capital is mostly provided by banks extending a line of credit.
Another business decision concerning finance is investment, or fund management. An investment is an acquisition of an asset in the hope that it will maintain or increase its value. In investment management -- in choosing a portfolio -- one has to decide what, how much and when to invest. To do this, a company must:
? Identify relevant objectives and constraints: institution or individual goals, time horizon, risk aversion and tax considerations;
? Identify the appropriate strategy: active v. passive -- hedging strategy
? Measure the portfolio performance
Financial management is duplicate with the financial function of the Accounting profession. However, financial accounting is more concerned with the reporting of historical financial information, while the financial decision is directed toward the future of the firm.
Public finance:

Country, state, county, city or municipality finance is called public finance. It is concerned with
Identification of required expenditure of a public sector entity
Source(s) of that entity's revenue
The budgeting process
Debt issuance (municipal bonds) for public works projects

Reference :

http://knowledge.wharton.upenn.edu/category.cfm?cid=1
http://pages.stern.nyu.edu/~adamodar/
free encyclopedia

It would be better to know the second question in my mind to search for.

I think the important one is now:

WHAT IS CORPORATE FINANCE EXACTLY?

Oh I cannot believe that
I`m moving In a right way as I see.....
Up to 10 days I can know many things about finance and I will try to put my knowledge in this weblog for you

Comments

title-4400012

Thu, 03 Jul 2008 22:07:06 +0200

Good morning

I think one of the best ways for learning is, asking but not from the others but from yourself; So I have many questions and in this blog i`m going to answer them by searching in internet or in my university from my professors and the library(the place I love).

WHAT IS FINANCE AND WHAT WOULD WE LEARN ABOUT IT IN UNIVERSITY COURSES?
This is the first question in my mind about Finance.

It can be the first step for me to study Finance.

Comments

title-4395546

Wed, 02 Jul 2008 21:14:55 +0200

hello every body:

may be this first is not normal enoghe,

but................

interesting to have a blog in English about your course. Isn`t?

TRY IT

in this blog I am going to write about finance, the course I am going to countinue for master.

Please give me your recommends and help me to improve my information in this field,as I am sure we can improve with each other

I look forward for your helps

Comments