The New Arsenal of Risk Management.docx

1、The New Arsenal of Risk ManagementThe New Arsenal of Risk ManagementHarvard Business Review; Sep2008, Vol. 86 Issue 9, p92-100By Kevin Buehler; Andrew Freeman and Ron HulmeAbstract:The global banking system is facing a severe liquidity crisis: In the first half of 2008, major financial institutions

2、wrote off nearly $400 billion, causing banks around the world to initiate emergency measures. Similar crises have occurred within recent memory: Think of S&Ls, the dot-com bust, and Enron. Risk is, quite simply, a fact of corporate life-but because risk-management research has increasingly emphasize

3、d mathematical modeling, managers may find it incomprehensible and thus shy away from powerful tools and markets for creating value. Buehler, Freeman, and Hulme, all with McKinsey, describe the evolution of risk management since the 1970s, show how new markets have changed the landscape in both fina

4、ncial services and the energy sector, and explain what it takes to compete in the current environment. To demonstrate how significant a factor risk can be when incorporated into strategy and organization, they take the case of Goldman Sachs - which, despite its reliance on highly volatile trading re

5、venues, has so far avoided the big write-offs that have afflicted its leading competitors. The authors believe that this is because Goldman takes the antithesis of the typical corporate approach-its culture embraces rather than avoids risk. And, they say, Goldman very efficiently employs all four of

6、 the following factors: quantitative professionals, strong oversight, partnership investment, and a clear statement of business principles, with emphasis on preserving the companys reputation. Staying on the sidelines of risk management may have shielded some companies from crisis, but it has also p

7、revented them from growing as quickly as they might have. In their companion article, Owning the Right Risks, the authors outline a process that will enable executives in any company to incorporate risk into their strategic decision making. ABSTRACT FROM AUTHORSection: The Risk Revolution THE TOOLS

8、DISCUSSIONS OF RISK usually come to the forefront in times of crisis but then recede as normalcy returns. As we write, the global banking system is facing a major credit and liquidity crisis. Losses from subprime mortgages, structured investment vehicles, and covenant lite loans are creating a credi

9、t crunch that may in turn trigger a global slowdown. In the past year major financial institutions have written off nearly $400 billion, and central banks around the world have initiated emergency measures to restore liquidity. Several other crises have occurred within memory: the U.S. savings-and-l

10、oan collapse in the 1980s and 1990s, Black Monday in 1987, the Russian debt default and the related dive of Long-Term Capital Management in 1998, the dot-com bust of 2000, and the Enron-led merchant-power collapse of 2001.The resounding message is that risk is always with us. Executives need to wake

11、 up to that fact. Unfortunately, a growing emphasis on mathematical modeling has rendered much of the risk-management debate and research incomprehensible to those outside the finance function and the financial services industry. As a result, many corporate managers have shied away from the powerful

12、 risk-management tools and markets created over the past three decades - and thus have forgone considerable opportunities to create value.Our aim here is to help managers understand both the advantages and the limitations of the markets and tools that are implicated in the credit and liquidity crisi

13、s. We will describe the evolution of risk management in recent decades, show how new markets have changed the landscape in both financial services and the energy sector, and explain what it takes to compete in the current environment. These analyses will help readers make sense of the crisis and wil

14、l illustrate just how powerful a lens risk can be when applied to corporate strategy and organization. In the companion article published in this issue, we describe a process whereby executives in all companies can incorporate risk into their strategic decision making.The Idea That Changed the World

15、 For the first 70 years of the twentieth century, corporate risk management was largely about buying insurance. Risk management in the financial sector was also rudimentary: Bank regulators lacked tools for measuring risk in the system, so constructive intervention was difficult. Banks themselves ha

16、d no way to control the interest-rate risk in their loan portfolios or to quantify and manage credit risk - in part because few alternatives to insurance existed. To be sure, some futures and options contracts were written and sold, but reliable tools for pricing them were rare, and the markets for

17、these securities were thin and characterized by wide bid-ask spreads.The low level of interest in risk management was also to some extent a product of prevailing thought in finance, originating with Franco Modigliani and Merton Millers indifference theory, which argued that a companys value was not

18、(in most cases) affected by capital structure or hedging, and the capital asset pricing model (CAPM), developed by William Sharpe and others, which argued that risk should be managed primarily through portfolio diversification by investors. (For a summary of the main theories relating to the field,

19、see the exhibit The Evolution of Risk Management.)All this began to change in 1973, with the publication of the options-pricing model developed by Fischer Black and Myron Scholes and expanded on by Robert C. Merton. The new model enabled more-effective pricing and mitigation of risk. It could calcul

20、ate the value of an option to buy a security as long as the user could supply five pieces of data: the risk-free rate of return (usually defined as the return on a three-month U.S. Treasury bill), the price at which the security would be purchased (usually given), the current price at which the secu

21、rity was traded (to be observed in the market), the remaining time during which the option could be exercised (given), and the securitys price volatility (which could be estimated from historical data and is now more commonly inferred from the prices of options themselves if they are traded). The eq

22、uations in the model assume that the underlying securitys price mimics the random way in which air molecules move in space, familiar to engineers as Brownian motion.The core idea addressed by Black-Scholes was optionality: Embedded in all instruments, capital structures, and business portfolios are

23、options that can expire, be exercised, or be sold. In many cases an option is both obvious and bounded - as is, for example, an option to buy General Electric stock at a given price for a given period. Other options are subtler. In their 1973 paper Black and Scholes pointed out that the holders of e

24、quity in a company with debt in its capital structure have an option to buy back the firm from the debt holders at a strike price equal to the companys debt. Similarly, the emerging field of real options identified those implicit in a companys operations - for example, the option to cancel or defer

25、a project based on information from a pilot. The theory of real options put a value on managerial flexibility - something overlooked in straightforward NPV calculations, which assume an all-or-nothing attitude toward projects.The new model could hardly have come at a more propitious time, coinciding

26、 as it did with the spread of the handheld electronic calculator. Texas Instruments marketed an early version to financial professionals with the tagline Now you can find the Black-Scholes value using our calculator. The calculators rapid acceptance by options traders fueled the growth in derivative

27、s markets and the broad development of standard pricing models. Other technological advances quickly followed: In 1975 the first personal computers were launched. In 1979 Dan Bricklin and Bob Frankston released VisiCalc, the first spreadsheet designed to work on a personal computer, giving managers

28、a simple tool with which to run what-if scenarios. The financial sector rapidly developed new instruments for managing different types of risk and began trading them on exchanges - notably the Chicago Board Options Exchange - and in over-the-counter derivatives markets.By the 1980s, with calculating

29、 muscle inexorably increasing on the trading desk, it had become far easier to identify, price, and trade different kinds of options. Among the most influential machines were workstations developed by Sun Microsystems and Digital Equipment and the Bloomberg Terminal, which revolutionized price calcu

30、lation in derivatives and fixed-income markets respectively. Crystal Ball and other firms developed software that allowed traders to run Monte Carlo simulations in a matter of minutes on laptops, rather than overnight on mainframe computers. By the beginning of the 1990s it was possible to buy contr

31、acts that covered a wide variety of risks using derivatives of various kinds - options, futures, and swaps, often in combination. Derivatives markets began with currencies, equities, and interest rates and quickly expanded to include energy, metals, and other commodities. In a second wave of innovat

32、ion, instruments emerged that allowed the hedging or transfer of credit risk, at that time the major remaining category of financial risk and a subject of concern among bank regulators. By the end of the decade derivatives markets were exploding; the notional value of the securities involved rose fr

33、om $72 trillion in 1998 to $370 trillion in 2006. By the end of 2007 the total had reached almost $600 trillion. The market was so sophisticated that synthetic CDOs - derivatives of derivatives of derivatives - soon appeared and in fact were the fastest-growing sector of the multi-trillion-dollar market for collateralized debt obligations un