risk management decisions
risk management decisions;
This assignment is aimed at making you think about the cash flows that occur under different risk management decisions. To do the assignment you need to be familiar with the NPV method of investment appraisal as summarised in WSY8 on pages 333 – 337 or HN pages 585 588 or available in any textbook entitled ‘Corporate Finance’. Alternatively, satisfy yourself that if NPV is positive in the following equation a project is probably worth undertaking.
NPV = t – I
Where , Ct = net cash flows in period t
k = ‘a suitable discount rate’
I = the initial investment
t = time period
This equation is useful for investment projects in general but you are required to consider the NPV equation specifically in relation to corporate risk management decisions.
The title of your assignment and the question(s) you must answer is:
a) What are the real-world components of Ct, I and k for evaluating the following types of risk management activities at NPV?
i) risk retention
ii) risk transfer
iii) risk control, and
iv) risk avoidance.
b) Provide practical suggestions for estimating realistic values for the variables identified in part a) of the question.
Hint: Remember that Ct represents net cash flows so you need to consider both positive and negative cash flows.
If you choose Assignment B your answer might be similar to your answer to Assignment A if you had chosen it – but not necessarily. This assignment allows you greater flexibility to approach the question in your own way and according to your own understanding of the subject.
Your assignment question is:
a) What are the key risk management decisions?
b) What are the direct costs and benefits of these decisions and how might they be estimated?
c) What are the indirect costs and benefits and how might they be estimated?
Hint: There is no universally agreed answer to part a) of the question – but, however you approach part a), keep your answers to parts b) and c) on the same track.
First of all, decide whether you want to risk manage (for purposes of doing your assignment). It could be a whole organisation or part of an organisation. Make it clear at the beginning of your assignment what exactly you have chosen to risk manage.
Your assignment is then as follows:
Your usual insurer has just sent you a quote for next year’s insurance premium and you consider it to be too high.
a) Explain the alternative risk management courses of action available to you, and
b)Explain the thought processes and analysis that should be undertaken in order to choose between the alternative courses of action.
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