Corporate risk is divided into three
1) Market risk (referring to fluctuations of interest rates,
currency values, commodity inventories and stock prices).
2) Credit risk (referring to loan default or rating downgrade).
3) Operational risk (referring, for example to natural disasters,
technology failures, accounting errors, crime, political changes,
and legal liabilities).
According to Meissner, recent new methodologies and concepts
have been developed to identify, measure and reduce these.
Market risk is well understood, and many products (such as
interest rate and currency futures and options) exist to
risk. Credit risk management however, is quite a new field. New
methods and concepts as well as new products such as Default
Swaps (essentially an insurance against default) and Total Rate
of Return Swaps (which protects against credit risk and market
risk) have emerged recently. These will be discussed and analyzed
in the class. Meissner himself has created new methodologies
in the field of credit risk management, which he presented at
MIT, Cambridge last fall.
Operational risk is a very new field with much ongoing research.
Some of this research will be conducted in Meissner’s class.
By the year 2007, every internationally active investment bank
will have to report, to the regulators, VAR numbers for all three
types of risk on a daily basis. A VAR (value at risk) number
expresses the maximum loss due to a certain type of risk, within
a certain time frame (typically one day) with a certain probability.
Hence, academics and practitioners are currently trying to
find methods and algorithms to derive the VAR numbers. This
difficult for credit risk and operational risk, since these types
of risks are difficult to quantify. Solutions to these problems
will be derived and analyzed in class.
According to Meissner, several of his former students are already
working in risk management in New York and London. “With
this new class,” he said, “hopefully more HPU students
will find excellent careers in the field.”