BUSINESS FINANCE 4239 Risk Management Professor: Prof. Bernadette A. Minton Office: 700E Fisher Hall Email: minton.15@fisher.osu.edu Phone: (614) 688 3125 Office Hours: Wednesdays, 10:00 a.m. 11:00 a.m. and by appointment. Course Description Business Finance 4239, Risk Management, extends the skills developed in Corporate Finance and Investments classes to the role of risk management within the firm. Taking risks and mitigating risks is an integral part of what Senior Executives and Board of Directors do to create shareholder value. Yet, the recent global financial crisis and corporate meltdowns suggest that many companies do not fully understand the many risks that they face or how to balance these risks to create value. The current business environment also is changing. Companies around the world are investing in enterprise risk management (ERM) functions and risk-aware employees. Risk management has become one of the top priorities of boards, investors, regulators, and rating agencies. In this course, students will learn how to identify, evaluate and manage risks with the goal of balancing risks to create value. They will gain insights into the features of a value-enhancing risk management function with the goal of developing the skills needed to be an effective member of a risk management team as well as a risk aware professional. To this end, students will learn: Concepts of risk, risk management and enterprise risk management The roles of governance and culture in risk management The main features of a value-enhancing risk management function The concepts of risk appetite and risk tolerance How to identify, assess (quantitatively and qualitatively) and manage the major risks facing the firm How to effectively use risk reporting (written, visual, and verbal) within the organization to create an understanding of the major risks impacting the firm At the end of this course, students will be able to demonstrate that they understand: The breadth and depth of risks companies face The importance of considering both risk and reward in decision-making The applications of ERM principles and the linkage with value creation and theory Existing and emerging ERM frameworks and perspectives How to think in the context of ERM How to apply ERM concepts to business scenarios (the real world )
Course Resources 1. Course lecture notes are posted on the course website. Please bring your notes to class each day to participate in the class discussion. 2. Required readings posted on the class website. Students are expected to have completed the assigned reading before class. To encourage preparation and facilitate class discussion, students will be called on in class to share their insights. 3. Harvard Business School Course Packet: Please follow this link http://cb.hbsp.harvard.edu/cbmp/access/51581172 and follow the instructions below: a. Click Register Now. b. Enter name, email, and educational program, and create a username and password. c. Click Register. d. Login with the username and password you just created. e. Purchase the course packet contents (Value-at-Risk Background Note and 2012 Fuel Hedging JETBLUE case) 4. Suggested readings related to current events will be posted occasionally on the class website. 5. Additional Resources: This course stresses the impact financial institutions have on business practices. Below are some national and international news resources that are relevant to the course and excellent sources of information for any serious business student. The Wall Street Journal (WSJ) provides national and international news as well as detailed information on financial markets and institutions. The Financial Times is a daily newspaper out of London with a US edition. The Financial Times offers a much more extensive coverage of economic and business activity outside of the United States, compared to mostly domestic news sources such as the WSJ. The Economist is an outstanding weekly British newsmagazine that analyzes the week s events and surveys financial market developments. Its target audience includes senior executives as well as high ranking government officials. Course Requirements The course requirement include the following components. Component % of total course grade Assignments 20% Bloomberg Risk Assessment Group Project 20% Quizzes 5% Exam 30% Course Project 25% 2
1. Assignments: The assignments, unless otherwise noted, are group work, with each group working independently of all other groups. Groups can have no more than three (3) students. The assignments include exam-style problems, case studies discussion questions, questions related to assigned readings and completion of in-class exercises to be completed outside of class. All assignments are due at the beginning of class on the date indicated in the assignment. No late assignment will be accepted (See Course Schedule for assignments and dates). Please note, the assignments that are related to the completion of in-class exercises are not listed on the syllabus. Each assignment grade will contribute equally towards the Assignments component grade. 2. Bloomberg Risk Assessment Group Project: In this group project, students will use Bloomberg tools to evaluate various types of risks associated with a firm s securities. Details of the project will be discussed in class and posted on the course website during the start of the semester. The Bloomberg Risk Assessment Group Project will count towards 20% of the total course grade. 3. Exam. There will an exam on Thursday, November 3 rd. The exam grade will count towards 30% of the total course grade. 4. Course Capstone Project: In the Course Capstone Project students will identify and assess the risks associated with a firm s strategy and mission and provide recommendations related to strategies to manage the risks to create value and the firms ERM framework. The Client firm senior management team will visit the class on September 27 th to kick-off the project. This is a group project. You will not be permitted to work alone under any circumstances, so please plan accordingly. More details about the project will be available on the class website by September 16 th. The Course Capstone Project grade will count towards 25% of the total course grade. 5. Quizzes. There will be periodic quizzes covering required readings and class material. Each quiz will take place at the start of class and last about 15 minutes. Information about what will be covered on each quiz will be given in class. The lowest Quiz grade will be dropped and the each of the remaining Quiz grades will contribute equally towards the Quizzes component grade. 6. Class Attendance and Participation: Students are expected to attend class and to arrive on time. To a significant extent, the value you get from the course depends on your presence in class, and your classmates opportunities to learn from your insights depend on your presence in class. As noted above, students are expected to have completed the assigned reading and exercise posted on the course content page before the start of class. To encourage 3
preparation and facilitate class discussion, students will be called on in class to share their insights. As is the case with real world work environments, you are judged not by what you know but by what you contribute. Even if you feel that you know the material, unless you share your insights with the class, I cannot adequately evaluate your preparedness and contribution. Students are never penalized for making comments which do not appear to be the right answer. It is only through consideration of many diverse opinions and viewpoints that we will move toward a greater shared understanding of the multidimensional material which this course entails. Class Participation will be considered when determining a student s final course grade Exam Policy: Everyone will take the exam on the assigned date. There is no make-up exam. Quiz Policy: Everyone will take the quizzes on the dates listed in the course syllabus. There are no makeup quizzes. Extra Credit/Grade Change Policy: Extra credit will not be offered unless it is available to the entire class. For example, if a student wishes to improve his grade at the end of the course, extra credit will not be available for this purpose, as it unfairly penalizes students who have consistently worked hard throughout the course. This policy is strictly enforced. Electronic Devices Policy: The absence of unnecessary distractions and interruptions is essential for a positive and effective learning environment. Thus, students may not use any electronic device in class, unless explicitly permitted by the instructor. All electronic devices must be turned off and put away prior to the start of class. Students who want to take electronic notes may do so but only if it is on a tablet device and that tablet must remain on the flat table top for the entire class time. Office hours and reviews: Unless announced otherwise, I am available to meet with students on an individual basis during office hours or by appointment. Please speak to me before class or email me to make an appointment for an office visit. Please give me a general idea of the topic you d like to discuss so that I can be as prepared as possible for your visit. Course website: I maintain a course website through Carmen (using the University s new Canvas system). The URL is https://carmen.osu.edu. I will use the website to post course slides, readings, materials for guest speakers, and assignments. Please check the website on a regular basis. 4
Communication: The quickest way to contact me is by email at minton.15@fisher.osu.edu. I will usually respond within a few hours. ACADEMIC INTEGRITY Academic integrity is essential to maintaining an environment that fosters excellence in teaching, research, and other educational and scholarly activities. Thus, The Ohio State University and the Committee on Academic Misconduct (COAM) expect that all students have read and understand the University s Code of Student Conduct, and that all students will complete all academic and scholarly assignments with fairness and honesty. Students must recognize that failure to follow the rules and guidelines established in the University s Code of Student Conduct and this syllabus may constitute Academic Misconduct. The Ohio State University s Code of Student Conduct (Section 3335-23-04) defines academic misconduct as: Any activity that tends to compromise the academic integrity of the University, or subvert the educational process. Examples of academic misconduct include (but are not limited to) plagiarism, collusion (unauthorized collaboration), copying the work of another student, and possession of unauthorized materials during an examination. Ignorance of the University s Code of Student Conduct is never considered an excuse for academic misconduct, so I recommend that you review the Code of Student Conduct and, specifically, the sections dealing with academic misconduct. (You can find the full Code at http://studentlife.osu.edu/pdfs/csc_12-31-07.pdf ) If I suspect that a student has committed academic misconduct in this course, I am obligated by University Rules to report my suspicions to the Committee on Academic Misconduct. DISABILITY SERVICES The Student Life Disability Services (SLDS) (www.ods.ohio-state.edu) verifies students with specific disabilities and develops strategies to meet their needs. Students requiring accommodations based on identified disabilities should contact the instructor at the beginning of the term to discuss their particular needs. Students with a specific disability are encouraged to contact SLDS to explore potential accommodations available to them. 5
COURSE SCHEDULE PART 1: WHY RISK MANAGEMENT? The Interest and the Need Week Dates Topic, Readings, and Assignments 1 2 3 TU, AUG 23 TH, AUG 25 TU, AUG 30 TH, SEP 1 TU, SEP 6 TH, SEP 8 What is Risk? Why Risk Management? Why ERM? How has RM evolved to ERM? 1. Nocco, B. and R. Stulz, Enterprise Risk Management: Theory and Practice, Journal of Applied Corporate Finance, 2006. 2. Roggi, Garvey, and Damodaran, (RGD) Risk Taking, A Corporate Governance Perspective, 2012 (RGD) 1, Chapter 2. COMPLETE ON-LINE Student Survey by AUG 24 th, 6:00PM Theories of RM to ERM Risk Management Failures 1. Smithson and Simkins, Does Risk Management Add Value: A Survey of the Evidence, Journal of Applied Corporate Finance, 2005. 2. Stulz, How Companies Can Use Hedging to Create Shareholder Value, Journal of Applied Corporate Finance, 2013. 3. Kaplan, R. and A. Mikes, Risk Management - The Revealing Hand, Journal of Applied Corporate Finance, 2016. Risk Management and Value Exercise due SEP 1 QUIZ: SEP1 (Covers Week 1) SEP 6: Governance, Culture and Risk Management SEP 8: Guest Speaker: Robert Lane (Bank Board of Director, CEO Lane Leadership Corp and former President, Keybank) 1. Lam, 2009, What is Wrong with Risk Management? AFP Exchange. 2. RGD, Chapter 3. 3. Readings for Guest Speaker TBA (see course website for updates) Governance, Culture Assignment due SEP 8 1 Note: The RGD article (about 64 pages) will be used throughout the course. 6
PART 2: AN ERM FRAMEWORK: Tools to become a valuable risk aware professional Week Dates Topic, Readings, and Assignments Risk Appetite & Risk Identification Risk Assessment : Part 1 4 5 6 7 TU, SEP13 TH, SEP 15 TU, SEP 20 TH, SEP 22 TU, SEP 27 TH, SEP 29 TU, OCT 4 TH, OCT 6 1. Wittenberg and Pellerin, Defining your Risk Appetite: The Importance of Taking a Quantitative and Qualitative Approach, 2012. 2. WillisWire, Guide to ERM: Risk Appetite and Tolerance, Dec. 30, 2014. Risk Appetite & Risk Identification Exercise due SEP 15 Risk Assessment Part 2 Qualitative, Semi-quantitative, and Quantitative Approaches 1. RGD, Chapters 5(through Step 3) and 6. 2. Nocera, Risk Management, NY Times Magazine, Jan. 2, 2009. 3. Das and Lynagh, Value-at-Risk. (HBS Course Packet). TBA (Completing in-class exercise) QUIZ: SEP 22 (Covers Week 4) SEP 27: Course Capstone Projects Presentation from Client SEP 29: Risk Assessment - Part 3,Role of Big Data & Data Analytics 1. Readings for Guest Speakers TBA and posted on course website 2. Readings for SEP 29 TBA and posted on course website Assignments: 1. Preparation for Client Discussion Assignment due SEP 27 2. Qualitative & Semi-Quantitative Risk Assessment Assignment due SEP 29 Approaches to Managing Risk Part 1 1. RGD, Chapter 5(Step 3), 6, and 7 2. Meulbroek, 2002, A Senior Manager s Guide to Integrated Risk Management, Journal of Applied Corporate Finance. 3. Gécy, Minton, and Schrand, The Use of Multiple Risk Management Strategies: Evidence from the Natural Gas Industry (Paper Translation of 2006 Journal of Risk article) Bloomberg Risk Assessment Project due OCT 6 7
PART 2: AN ERM FRAMEWORK: Tools to become a valuable risk aware professional cont. Week Dates Topic, Readings, and Assignments 8 9 10 11 TU, OCT 11 TH, OCT 13 TU, OCT 18 TH, OCT 20 TU, OCT 25 TH, OCT 27 TU, NOV 1 TH, NOV 3 OCT 11: Guest Speaker: Rongsheng Gong, Risk Manager, Huntington Bank OCT 13 FALL BREAK NO CLASS Readings for Guest Speaker TBA and posted on course website Strategic Risk: FinTech Pre-read Assignment due OCT 11 Approaches to Managing Risk Part 2 Risk Reporting and Communications 1. See Week 7 (Approaches to Managing Risk Part 1) 2. Nottingham, Risk Communication and Aligning the Board and the C-suite, 2013. 2012 Fuel Hedging at JETBLUE Airlines (HBS Course Packet) Prep-work Assignment due OCT 18 QUIZ: OCT 20 (Covers Approaches to Managing Risk) OCT 25: Putting it all together: The ERM framework review OCT 27: Guest Speaker: Rodolfo Martell, International Equity Portfolio Manager, QMA Asset Management 1. J&J, Framework for Enterprise Risk Management 2. Readings for Guest Speaker TBA and posted on course website Pre-read and Asset Management RM Assignment due OCT 27 Exam Week NOV 1: Review for Exam (Prepare Study Exam Questions) NOV 3: EXAM 8
PART 3: PUTTING IT ALL TOGETHER & THE FUTURE Week Dates Topic, Readings, and Assignments Operational Risks 12 13 14 15 and 16 FINALS WEEK TU, NOV 8 TH, NOV 10 TU, NOV 15 TH, NOV 17 TU, NOV 22 TH, NOV 24 TU, NOV 29 THS, DEC 1 TU, DEC 6 MON, DEC 12, 10:00-11:45AM NOV 10: Guest Speaker, Brittany Altstaetter, Manager, ERM, Worthington Industries 1. Reading on Operational Risk TBA and posted on course website 2. Worthington Industries Overview Assignments: 1. Operational Risk & Worthington Industries Assignment due NOV 8 2. Course Capstone Project Part 1 due NOV 10 NOV 15: Course Project Part 2 NOV 17: Guest Speaker, Doug Huffner, Chief Risk Officer, The Ohio State University Required Reading: EY, Expecting More from Risk Management, 2014. Assignments: OSU Emerging Risks to Brand Assignment DUE Nov 17 NOV 22: Current Issues in RM Where do we go from here? NOV 24: THANKSGIVING HOLIDAY NO CLASS Required Reading: TBA and posted on course website Reflection Short Memo on Emerging Risk Issues due NOV 22 NOV 29: Course Project Presentations Prep work DEC 1 & 6: Course Project Presentations Assignments: 1. Course Capstone Project Part 2 due DEC 1 2. Copies of Presentation Slides (6 to pages) due DEC1 (# of copies TBD) Online QUIZ To completed by 11:45AM DEC 12 9