Law and Economics
Business Strategy and Operations
“All of life is the management of risk, not its elimination.”
Walter Wriston, Former CEO of Citicorp
Risk Management |
In the last decade, significant advances have been achieved in measuring and managing risk. Among these advances are the introduction and current widespread acceptance of Value-at-Risk for measuring market risk, the assessment of credit risk on a portfolio-wide basis, and the recent introduction of operational risk into the overall risk measurement and management framework.
The increasing quantification of risk makes it a central theme in both the daily operations and long-term strategy of most organizations. Risk management is no longer strictly a response to regulatory requirements. It has instead become a business necessity and often a competitive advantage to those firms who recognize and understand its value. Effective risk management provides firms the ability to stabilize cash flows. Perhaps more important, it offers firms a way to customize their risk profile, shedding the risks they are unwilling to bear, and enabling them to concentrate on their primary businesses. Ultimately, enhanced risk management better aligns risk and return, thereby allowing firms to survive and prosper in today’s increasingly complex financial environment.
Economists Incorporated combines industry knowledge with strong financial modeling and statistical capabilities to offer customized risk management solutions to both financial and non-financial corporations.
EI’s Approach to Risk Management
Although many firms may be exposed to similar risks, all firms are inherently different and their exposures to each type of risk are distinct from one another. As a result, no packaged software program or analysis template can provide the kinds of customized analyses required by individual firms.
EI’s approach is to determine the individual needs of each company and to tailor its analysis to fit the client’s particular situation. At times, EI analysts may draw on the output of packaged software programs to assist our clients. In other instances, they may develop customized software that addresses the clients’ unique circumstances. EI also works closely with risk-management personnel in our client organizations to create systems and processes whereby risk management tools can be monitored, assessed and revised. This close working relationship enables EI to combine analyses, tools and ideas into practical recommendations that assist clients in management planning and strategy formulation. EI thus offers complete and customized solutions to each client to address their specific risk management needs.
EI has the unique combination of technical expertise and professional experience necessary to fully understand the distinct risk framework under which each firm operates. All EI professionals have advanced degrees from leading universities. In addition, many EI economists have vast industry experience and have held important regulatory positions, including key positions in the Federal Reserve System, Securities and Exchange Commission, Commodities Futures Trading Commission, Council of Economic Advisors, Federal Trade Commission and U.S. Department of Justice.
Risk Management |
EI’s Risk Management Services offer solutions in areas such as:
Best Practice Benchmarking
Credit Decision Making
Management Planning and Forecasting
Optimal Portfolio Allocation
EI’s Risk Management Services Include:
Identification: EI has the expertise and industry background to properly identify the market, credit, and operational risks firms are exposed to on a daily basis, as well as the business, regulatory, and strategic risks firms are exposed to in the longer term.
Quantification: EI has the technical knowledge to accurately quantify a firm’s risk exposures using the most advanced, yet appropriate, valuation methodologies and pricing techniques.
Implementation: EI has the resources and capability to develop and effectively implement the tools and techniques necessary for superior risk management.
Validation: EI has the sophisticated knowledge and analytical expertise necessary to validate the financial pricing and risk measurement models used by firms in different industries.
Benefits from EI’s Risk Management Services:
Basel II: The forthcoming implementation of the Basel II Accord is paving the way for financial institutions to manage risk proactively. This, in turn, is providing incentives for banks of all sizes to enhance their risk measurement and management capabilities.
EI offers the most comprehensive solutions to assess the financial and strategic impact of Basel II and then implement ongoing policies, systems, and procedures to optimize a bank’s risk management function.
Regulatory Compliance: Banks operating under a cease and desist order or other written agreement with regulators can face severe restrictions on their activities or even seizure by regulatory authorities. Such operating restrictions often involve policies and procedures related to risk. Compliance with regulatory directives, however, is often cumbersome and quite difficult within a short time period.
EI offers full assistance with satisfying the requirements outlined in regulatory directives in areas such as strategic and profit plan development, loan review, loss exposure, and overall risk management.
Credit Decision Making: While information on large public companies is easily accessible, most financial institutions struggle with the process of analyzing and monitoring smaller, private entities, which usually account for the majority of borrowers. In addition, many of the deals involving smaller companies contain unique and complex characteristics that cannot be incorporated into standard software applications. As a result, firms have been aggressively seeking robust internal quantitative credit scoring models. The core of any credit decision-making system is the scoring analytics. EI offers the most advanced and customizable methods necessary to create applicable credit scoring systems and analysis. In addition to the scoring analytics, institutions also face the challenge of determining the appropriate price points at which to offer or refuse credit. If the threshold is too high, lenders lose out on potentially valuable customers. If the threshold is too low, lenders are not properly compensated for the risks to which they are exposed. In addition, important consideration must be given to the interrelation of obligors within a firm’s portfolio in order to properly assess the credit decision.
EI offers detailed review, analysis and optimization of a firm’s credit decision-making criteria and credit pricing process.
Corporate Hedging: In today’s complex business environment, both financial and non-financial firms are exposed to a broad array of risks. The decision by a corporation to hedge varies by the type of exposure, duration of the hedge, the type of hedging instruments available, and the overall goals of management. The challenge to senior management is determining and implementing an adequate hedging strategy that meets the goals and objectives outlined by the firm.
EI offers full examination of a firm’s risk exposure including thorough analysis and implementation of proper hedging strategies.
Energy Markets: The restructuring and deregulation of energy markets have opened the need to understand and mitigate a wide variety of risks affecting both sellers and buyers of energy. A power generator has to manage risks related to fuel, inputs, plant operation, and generation across several markets clearing sequentially across commodities, locations in the transmission system, and time periods in the dispatch. A power grid owner has to understand the direction, magnitude, and frequency of transmission constraints. A trader has to contend with uncertainties that could cause energy prices to spike. A load-serving utility has to make long-term prudent procurement decisions that have to pass regulatory scrutiny. A manufacturing enterprise has to design an appropriate power contract for the most energy-vulnerable part of its production process. Energy market players can address these risks by holding options, and the option traders themselves need to analyze these risks in order to price their options.
EI offers complex modeling and analysis of various energy commodity markets in order to assist energy buyers and sellers in the design and implementation of adequate risk management and pricing programs.
Structured Finance: Many organizations are offering certain financial products and services, such as insurance or investment products, for the first time. Moreover, newly created financial products or unique pricing schemes are being introduced on a regular basis. Many of these new offerings, however, bring with them complex characteristics that may conceal some of the consequences of their introduction. These products, whether new to the firm or to the industry, require extensive analysis in order to determine their feasibility and overall impact on the organization, its risk profile, and its bottom line.
EI offers complete analysis and proper due diligence of new product offerings including market/customer analysis, pricing, risk exposure, and profitability.
Employee Stock Options: The proposed expensing of employee stock options has firms scrambling to assess the requirements set forth by the Financial Accounting Standards Board. That is, each particular firm will need to analyze and establish the most appropriate pricing framework and applicable valuation technique. The various pricing methods allowable by FASB, however, entail quite different data, analysis, and estimation requirements. The underlying standard is that the value be “based on established principles of financial economic theory.” These requirements, coupled with firm-specific characteristics, will drive the relevant pricing framework.
EI offers full and detailed analyses to determine the appropriate option pricing methodology (i.e. closed form, lattice, etc.) including implementation of proper option pricing tools and techniques.
2015 © Economists Inc. All Rights Reserved.