In class we have been discussing risk tolerance little bit, with respect to industries as a whole, as well as particular companies, and individuals’ portfolios. So I decided to learn a little bit more about how risk tolerance is assessed, and find some instances to view risk tolerance. One thing I find interesting is how individuals assess their own risk tolerance in deciding what investments to choose and how to keep their finances on track.
First of all risk tolerance, like discussed in class is the degree of uncertainty that an investor can handle in regard to a negative change in the value of his or her portfolio. I read an article from Consumer Reports Money Advisor that had very detailed information for investors on how to assess their personal risk tolerance on a variety of levels. I feel like this is a really important thing for investors to do on a frequent basis, especially given the high level of volatility in the market today. Assessing one’s risk tolerance helps plan for the future, and like the article stated “Determining your risk tolerance is essential.
You don’t want to react emotionally when the market tumbles.”
An additional aspect of the article that I found interesting was it offered resources for people to learn more about the risk and rewards associated with their investing activities. I think that often times people simply listen to the media when making financial decisions, and end up selling low, and then get back in when the media say that the market is starting to run up, even though it may not always work out like planned. By being better informed and educated about the market, people will be able to make better decisions in the diversification of their portfolios. One great resource the article gives readers is www.vanguard.com. Vanguard’s website offers an online risk-tolerance questionnaire, with relevant suggestions on how to apportion one’s money between stocks, bonds, and cash. This is very helpful so that investors can calculate how risk tolerant they are, and how much they could lose given their investment choices.
Additionally, the article also discussed other need’s one has in order to protect themselves from risks in life. One of the main issues discussed was life and health insurance. The article explains that most people do not buy nearly enough coverage to protect themselves. For life insurance in particular, “They rely on old rules of thumb, like buying coverage equal to six times their annual income. This method doesn’t take into account your financial goals, like putting your children through college or providing a comfortable retirement income for your surviving spouse.” I feel like it is very important for people to be well insurance, especially with regard to health insurance (and life insurance depending on age). I have a few friends that don’t have health insurance at all, and it is a scary thought that they may get very sick, and not have access to the medical treatment that they need. I feel like this is another level of measuring one’s risk tolerance. Sometimes, it seems that individuals view themselves as completely free of risk. But, individuals need to take a step back and see all that they could possibly lose, and all that is at risk.
From the article, I gained an even better understanding of risk tolerance and the importance of it in an individual perspective. I think that is clearly shows that it is beneficial to really consider one’s risk tolerance before entering into investments for a portfolio, or other risky aspects of life. This can help an individual personalize the correct portfolio for themselves based on their particular risk tolerance and how much uncertainty and possibility of losses they can handle.
Consumer Reports Money Advisor
Vanguard
Friday, March 27, 2009
Problems with the Public Education System in the U.S.
In Dwayne W.’s post from March 10th, he analyzes the U.S. public education system and the problems it has caused in the country. He asserts that our poor education system is much to blame for the economic crisis that we are currently in. Dwayne explains how many teachers nowadays simply pass all the kids in their classes, despite the fact that some really should be held back to ensure they have fully grasped important concepts. He explains that these poorly educated individuals often times grow up, and have a very poor understanding of finances and how to manage financial decisions within their lives – such as when entering into a mortgage. Dwayne argues that in order to fix the economy, we need to look are more than just money, and truly understand the underlying aspects behind the country’s problems. One of these main problems is the public school system. With more funding and focus on education, the U.S. will be able to see positive results, as our labor force becomes better educated and prepared for more advanced careers.Dwayne's Blog
Dwayne's Blog
I agree with the points that Dwayne brings up about the education system in the United States. Like him, I saw lack of concern for some students at my college, as teachers passed them, despite the fact that they really should have been held back. It seems to me that many times this occurs because teachers are highly reprimanded and questioned for failing a student in a class, particularly if it hinders the student from an on schedule graduation. Or, the teachers simply don’t want to deal with the student in their class anymore. This is a very poor way to look at education – if a student is struggling and fails to understand the material of the class, they should be held back until they fully understand it. Although holding them back may cause short term frustration for the student, it is undoubtedly worth it in the long run, as it will allow the student the opportunity to learn more and eventually achieve more success in life and their career. This will ultimately help the U.S. get out of the economic crisis, by increasing the pool of skilled, educated individuals in the country in the work force.
One article about this issue I read was published by Stanford University, and focused a great deal on how this education crisis is a cause of so many issues in the U.S., and contributes to the economic problems we face. New York City Schools Chancellor Joel Klein said that “The greatest domestic issue we as Americans face is failing to prepare students to compete globally in the 21st century.” I feel that this relates well to Dwayne’s article, because of the fact that without this, the U.S. will not be competitive with other countries labor around the world. The quality of public schools in the United States is embarrassing and upsetting compared to those of Asian and European countries, especially with regard to math and science. The problem is that without proper education, these individuals are unable to contribute much to the work force of the U.S. and employers look elsewhere to fill positions. This is causing companies to draw in more experienced, educated individuals from other countries, rather than looking within the country, causing a problem of diminishing jobs available.
"Public Education Crisis ‘The Greatest Domestic Issue’ Americans Face Today" by Lisa Trei
Additionally, another article I found placed the blame more on lack of math education, rather than just the U.S. public school system in general. This article, by James Bowers, gave some alarming statistics about the majority of the population. For example, “65 percent of respondents could not identify what remained if you subtracted 25 percent from eight. Another question revealed that 1 in 3 adults could not calculate 1 percent of 50,000.” If individuals can’t even do simple math such as this, how could they possibly calculate how much a mortgage would cost them, and if they were financially able to afford it based on their income. Clearly, the public education system did not do an adequate job at preparing these individuals for real world situations, such as a mortgage. Simple fees get translated into confusing annual percentage rates, and it's a lack of understanding on these issues that results in many people taking on car and home loans they can't afford, and overdrawing their bank accounts. In fact, a new FDIC study showed that banks make billions of dollars in overdraft fees - an expense that disproportionately targets low-income and uneducated Americans.
"Financial Mess Stems From Poor Math Education" by James Bowers
The problem is that the United States needs to be much more focused on education, starting from lower grade level children all the way through college aged students. More education and hard work from Americans ultimately leads to more economic freedom and will greatly help out the economy. Human capital is the most important resource, and it is something that the United States nowadays is clearly behind in. The problem is that there are few well educated individuals that can compete for high power, high paying positions in many companies, and a multitude of uneducated or poorly educated individuals with very little to offer. For example, in an article by Nicolle Girolamo and Helen Siaxabanis they explain the market now “consists of a few skilled labors that command high wages, while there is a flooded market of unskilled labor that ‘have little bargaining power.’” By focusing more on education, the U.S. will be able to increase the pool of talent, thus minimizing the effect of poor education on the economy.
"Lack of Education Driving Force of Poor Economy in U.S." by Nicolle Girolamo and Helen Siaxabanis
Overall, it is evident that the U.S. needs to do something to greatly improve the quality of the public school system. It seems that more and more, we are falling behind other countries, who consistently better prepare students for the future. If something isn’t done then individuals will continue to lack the knowledge necessary to lead a fulfilling life with a good career, and will continue to make mistakes, such as those that caused the whole mortgage crisis we are in. Additionally, if the education system is not improved, our level of human capital will continue to fall below that of other countries, and more and more employers will look to other countries for possible employees. By increasing our pool of educated, skilled labor, it will undoubtedly make a big difference for the U.S. economy.
Dwayne's Blog
I agree with the points that Dwayne brings up about the education system in the United States. Like him, I saw lack of concern for some students at my college, as teachers passed them, despite the fact that they really should have been held back. It seems to me that many times this occurs because teachers are highly reprimanded and questioned for failing a student in a class, particularly if it hinders the student from an on schedule graduation. Or, the teachers simply don’t want to deal with the student in their class anymore. This is a very poor way to look at education – if a student is struggling and fails to understand the material of the class, they should be held back until they fully understand it. Although holding them back may cause short term frustration for the student, it is undoubtedly worth it in the long run, as it will allow the student the opportunity to learn more and eventually achieve more success in life and their career. This will ultimately help the U.S. get out of the economic crisis, by increasing the pool of skilled, educated individuals in the country in the work force.
One article about this issue I read was published by Stanford University, and focused a great deal on how this education crisis is a cause of so many issues in the U.S., and contributes to the economic problems we face. New York City Schools Chancellor Joel Klein said that “The greatest domestic issue we as Americans face is failing to prepare students to compete globally in the 21st century.” I feel that this relates well to Dwayne’s article, because of the fact that without this, the U.S. will not be competitive with other countries labor around the world. The quality of public schools in the United States is embarrassing and upsetting compared to those of Asian and European countries, especially with regard to math and science. The problem is that without proper education, these individuals are unable to contribute much to the work force of the U.S. and employers look elsewhere to fill positions. This is causing companies to draw in more experienced, educated individuals from other countries, rather than looking within the country, causing a problem of diminishing jobs available.
"Public Education Crisis ‘The Greatest Domestic Issue’ Americans Face Today" by Lisa Trei
Additionally, another article I found placed the blame more on lack of math education, rather than just the U.S. public school system in general. This article, by James Bowers, gave some alarming statistics about the majority of the population. For example, “65 percent of respondents could not identify what remained if you subtracted 25 percent from eight. Another question revealed that 1 in 3 adults could not calculate 1 percent of 50,000.” If individuals can’t even do simple math such as this, how could they possibly calculate how much a mortgage would cost them, and if they were financially able to afford it based on their income. Clearly, the public education system did not do an adequate job at preparing these individuals for real world situations, such as a mortgage. Simple fees get translated into confusing annual percentage rates, and it's a lack of understanding on these issues that results in many people taking on car and home loans they can't afford, and overdrawing their bank accounts. In fact, a new FDIC study showed that banks make billions of dollars in overdraft fees - an expense that disproportionately targets low-income and uneducated Americans.
"Financial Mess Stems From Poor Math Education" by James Bowers
The problem is that the United States needs to be much more focused on education, starting from lower grade level children all the way through college aged students. More education and hard work from Americans ultimately leads to more economic freedom and will greatly help out the economy. Human capital is the most important resource, and it is something that the United States nowadays is clearly behind in. The problem is that there are few well educated individuals that can compete for high power, high paying positions in many companies, and a multitude of uneducated or poorly educated individuals with very little to offer. For example, in an article by Nicolle Girolamo and Helen Siaxabanis they explain the market now “consists of a few skilled labors that command high wages, while there is a flooded market of unskilled labor that ‘have little bargaining power.’” By focusing more on education, the U.S. will be able to increase the pool of talent, thus minimizing the effect of poor education on the economy.
"Lack of Education Driving Force of Poor Economy in U.S." by Nicolle Girolamo and Helen Siaxabanis
Overall, it is evident that the U.S. needs to do something to greatly improve the quality of the public school system. It seems that more and more, we are falling behind other countries, who consistently better prepare students for the future. If something isn’t done then individuals will continue to lack the knowledge necessary to lead a fulfilling life with a good career, and will continue to make mistakes, such as those that caused the whole mortgage crisis we are in. Additionally, if the education system is not improved, our level of human capital will continue to fall below that of other countries, and more and more employers will look to other countries for possible employees. By increasing our pool of educated, skilled labor, it will undoubtedly make a big difference for the U.S. economy.
Friday, March 20, 2009
AIG Executive Bonuses
In Yu Y.’s post from March 16, 2009 he argues that the AIG bonus payments to executives are a bad thing and that the company needs to be restructured, especially with regard to their risk management techniques in place. He explains that by accepting such huge bailouts from the government, AIG is not only ruining their public reputation, but they are also putting a huge burden upon taxpayers, who are now expected to pay for these executive’s bonuses. He believes that by redesigning AIG, they will slowly but surely regain a positive reputation and respect from the public.
Yu's Blog
Though I do agree with some parts of Yu’s post, I feel that he is not taking enough factors into consideration when looking at this bailout for AIG’s executives. The media seems to be portraying these AIG executives automatically in a very negative light, and this is simply not fair to them, since none of us really know anything about these executives. Though some of the fault for the failure of the company may be based on their actions, that’s not something we can really determine. There are many reasons why these bonuses may be quite needed, a good thing, and help AIG begin on the path to recovering and regaining their reputation. The reality of it is that they were promised these bonuses, they will cost $165 million, and it could have been avoided if specific bills were signed as listed in this article by the Associated Press, such as signing a provision on the economic stimulus bill that would have denied such payments being made.
AIG Executive Bonuses - Yahoo News
First of all, many AIG executives either would not take the bonus money in the first place, or have since given back the money received. In fact, many of them had even already given a great deal of their regular salary to AIG to help the company get through this crisis. If you think about it, these executives want to help AIG as much as they can, this is the company they work for, and if AIG fails, they are out of a job and looking for new work elsewhere. The below article details specifics on executives that have given back, or plan to give back their bonuses. One particular executive listed is Jon Liebergall, who was the co-head of North American marketing for AIG's financial products.
AIG Executive Give Back Bonuses
Another thing is that AIG executives were promised bonuses in their contracts. So many contracts lately have been completely thrown out and disregarded, but this is not a fair thing to do at all. If a contract is made and is then not something that has to be followed up with, why would anyone ever want to enter into a contract anymore? If one thinks about this from a risk management standpoint, consider things such as forward contracts. If an individual could enter into a forward contract and then not fulfill it – either by not paying as they had promised, or not delivering a set amount of goods, then no one would ever enter into this sort of contract again. Yes, it is unfortunate that AIG failed, and yes it is partially the fault of some employees, but it isn’t right to deny an executive a bonus, when most likely they were working hard all year in expectation of that bonus, as promised in their contract. The below article explains that these bonuses are necessary due to this contractual obligation, stating “an individual employee of AIG, who entered into a good faith contractual relationship with his employer requiring the employer to pay a bonus to the employee who has not broken the law or breached the employment contract, has a right to receive the benefit of the bargain – just like you and I do in our contractual relationships.”
AIG Contractual Obligation
Additionally, because AIG is going through such a rough time right now, the last thing they want to do is lose valuable, hard working employees. Though it is just speculation whether these executives were really hard working or not, we cannot simply just assume that they are responsible for the problems of the company. AIG needs to keep their talented workers right now, and if giving these executives bonuses is the way to do it, then at least that’s a start. If these executives were really great at their job, and didn’t receive the compensation they deserved, they would immediately be out looking for a new job, which is going to harm AIG even more.
I think that everyone needs to take a deeper look at the role these executive bonuses pay for AIG as a whole. It is not right to simply assume the worst about these executives, when that simply may not be the case. There are many reasons showing that these bonuses may really be needed to help out AIG, though it is unfortunate that such a huge bailout is required for them.
Yu's Blog
Though I do agree with some parts of Yu’s post, I feel that he is not taking enough factors into consideration when looking at this bailout for AIG’s executives. The media seems to be portraying these AIG executives automatically in a very negative light, and this is simply not fair to them, since none of us really know anything about these executives. Though some of the fault for the failure of the company may be based on their actions, that’s not something we can really determine. There are many reasons why these bonuses may be quite needed, a good thing, and help AIG begin on the path to recovering and regaining their reputation. The reality of it is that they were promised these bonuses, they will cost $165 million, and it could have been avoided if specific bills were signed as listed in this article by the Associated Press, such as signing a provision on the economic stimulus bill that would have denied such payments being made.
AIG Executive Bonuses - Yahoo News
First of all, many AIG executives either would not take the bonus money in the first place, or have since given back the money received. In fact, many of them had even already given a great deal of their regular salary to AIG to help the company get through this crisis. If you think about it, these executives want to help AIG as much as they can, this is the company they work for, and if AIG fails, they are out of a job and looking for new work elsewhere. The below article details specifics on executives that have given back, or plan to give back their bonuses. One particular executive listed is Jon Liebergall, who was the co-head of North American marketing for AIG's financial products.
AIG Executive Give Back Bonuses
Another thing is that AIG executives were promised bonuses in their contracts. So many contracts lately have been completely thrown out and disregarded, but this is not a fair thing to do at all. If a contract is made and is then not something that has to be followed up with, why would anyone ever want to enter into a contract anymore? If one thinks about this from a risk management standpoint, consider things such as forward contracts. If an individual could enter into a forward contract and then not fulfill it – either by not paying as they had promised, or not delivering a set amount of goods, then no one would ever enter into this sort of contract again. Yes, it is unfortunate that AIG failed, and yes it is partially the fault of some employees, but it isn’t right to deny an executive a bonus, when most likely they were working hard all year in expectation of that bonus, as promised in their contract. The below article explains that these bonuses are necessary due to this contractual obligation, stating “an individual employee of AIG, who entered into a good faith contractual relationship with his employer requiring the employer to pay a bonus to the employee who has not broken the law or breached the employment contract, has a right to receive the benefit of the bargain – just like you and I do in our contractual relationships.”
AIG Contractual Obligation
Additionally, because AIG is going through such a rough time right now, the last thing they want to do is lose valuable, hard working employees. Though it is just speculation whether these executives were really hard working or not, we cannot simply just assume that they are responsible for the problems of the company. AIG needs to keep their talented workers right now, and if giving these executives bonuses is the way to do it, then at least that’s a start. If these executives were really great at their job, and didn’t receive the compensation they deserved, they would immediately be out looking for a new job, which is going to harm AIG even more.
I think that everyone needs to take a deeper look at the role these executive bonuses pay for AIG as a whole. It is not right to simply assume the worst about these executives, when that simply may not be the case. There are many reasons showing that these bonuses may really be needed to help out AIG, though it is unfortunate that such a huge bailout is required for them.
Weather Derivatives
Recently in class we have been discussing derivatives and the role these play within risk management. We also specifically looked at weather derivatives and the affect these have on particular industries. I found this interesting so I found an article on a specific instance of a weather contract being used. The weather derivative contract in this article was entered into by Swiss Re and the International Development Association (IDA). The IDA is the arm of the World Bank that helps the world’s poorest countries.
I thought this was quite interesting, because usually individuals associate poorer, less developed countries with a higher agricultural industry, which seems to be true in this case. For this particular weather derivative that they entered into, Swiss Re will pay out up to $5,000,000 in the event that Malawi’s farmers suffer drought-related shortfall in maize production.
What was interesting about this contract was that it is structured on a rainfall index. Rainfall and maize production are highly correlated, so this worked well as a factor to base it upon. So, if the rainfall falls below a certain amount, Swiss Re will pay out an amount based on the projected loss. The article states that the maximum payout is reached if maize production drops to 10% below the historical average.
Like we discussed in class, it seemed that this derivative contract was well planned out as it is based on geography. Therefore, an individual farm owner must still do their work and it averages out for a certain geographic location within Malawi, since it depends upon the rainfall. This also works well because it reduces possible moral hazard. The contract is based upon historical maize production, and depends upon the rainfall which an individual cannot control, so it is definitely still in their best interest to farm as efficiently as possible. This is especially true since an easy comparison could be made between various farms within similar locations in Malawi with respect to their maize production.
Additionally, I found it interesting how heavily Swiss Re is involved in weather derivatives. From the article it seems as though they have been a huge member in dealing with weather risk transfer instruments. For example, they started with these risk instruments in India, reaching over 350,000 smallholder farmers. First looking at this, it seems like Swiss Re may have a lot of stake in weather derivatives, and is possibly not as diversified as they should be, given that there may unfortunate weather conditions around the world. However, I assume Swiss Re is a very large company and has significant stake in other industries and areas as well. Additionally, because Swiss Re has these types of contracts in areas around the world, it will most likely balance out in the end. For example, India may face very bad weather one year, harming their agricultural industry and costing Swiss Re money, but Malawi may have great weather and create a profit for Swiss Re since they won’t have to pay out any money to that specific country.
Swiss Re Weather Derivative
I thought this was quite interesting, because usually individuals associate poorer, less developed countries with a higher agricultural industry, which seems to be true in this case. For this particular weather derivative that they entered into, Swiss Re will pay out up to $5,000,000 in the event that Malawi’s farmers suffer drought-related shortfall in maize production.
What was interesting about this contract was that it is structured on a rainfall index. Rainfall and maize production are highly correlated, so this worked well as a factor to base it upon. So, if the rainfall falls below a certain amount, Swiss Re will pay out an amount based on the projected loss. The article states that the maximum payout is reached if maize production drops to 10% below the historical average.
Like we discussed in class, it seemed that this derivative contract was well planned out as it is based on geography. Therefore, an individual farm owner must still do their work and it averages out for a certain geographic location within Malawi, since it depends upon the rainfall. This also works well because it reduces possible moral hazard. The contract is based upon historical maize production, and depends upon the rainfall which an individual cannot control, so it is definitely still in their best interest to farm as efficiently as possible. This is especially true since an easy comparison could be made between various farms within similar locations in Malawi with respect to their maize production.
Additionally, I found it interesting how heavily Swiss Re is involved in weather derivatives. From the article it seems as though they have been a huge member in dealing with weather risk transfer instruments. For example, they started with these risk instruments in India, reaching over 350,000 smallholder farmers. First looking at this, it seems like Swiss Re may have a lot of stake in weather derivatives, and is possibly not as diversified as they should be, given that there may unfortunate weather conditions around the world. However, I assume Swiss Re is a very large company and has significant stake in other industries and areas as well. Additionally, because Swiss Re has these types of contracts in areas around the world, it will most likely balance out in the end. For example, India may face very bad weather one year, harming their agricultural industry and costing Swiss Re money, but Malawi may have great weather and create a profit for Swiss Re since they won’t have to pay out any money to that specific country.
Swiss Re Weather Derivative
Sunday, March 15, 2009
Economic Crisis: GM and Chrysler Bailout
In the post by Keval P. from February 21st, he discusses the problems that GM and Chrysler are facing within this difficult economy. He explains the possible merger that will occur between the two companies that has been discussed for some time now. He also explains that both GM and Chrysler feel like they are better off on their own, and will reduce costs by shutting down excess factories. Keval argues that the job loss from these two companies would be quite detrimental. Therefore, he feels like the 26 billion dollars that each of the companies have requested is reasonable and should be complied with by the US government. Keval feels that this is the best solution to protect these companies from further loss, and possible layoffs coming.
Keval's Blog
Although I do think that the jobs lost by the layoffs of GM and Chrysler would be quite unfortunate, it would not have a huge affect in the general scope of the current economy. If the statistics Keval is giving are accurate, then only 23,000 jobs would be lost from these two companies if the government doesn't keep stepping in to fund these companies. CNN reports that 2.6 million jobs have been lost in 2008, making unemployment rise to 7.2%. Therefore, although these additional layoffs would raise these numbers even higher, it is not a substantial amount compared to many other companies facing layoffs, especially at the cost of 26 billion per company to keep them funded.
CNN: Jobs Lost
Additionally, although the government could continue to help out with funding GM and Chrysler, it is just going to cause the government and the United States to go further into debt, and will cause more and more companies to request monetary assistance. I found an article that specifically deals with the GM bailout and ideas for how it should be approached. The article makes a good point, arguing that the government should not just hand over money to GM and Chrysler, but implement a plan to help out these companies while at the same time making sure they take the effort to restructure and that it doesn’t hurt tax payers. They suggest a “DIP (Debtor-in-Possession)” loan, which will cause less layoffs, let them restructure over 18-24 months, and minimize costs to tax payers since the DIP loan is provided financing directly, or through private financial institutions, and is well protected. I think this plan also seems like it will work well because it will make GM and Chrysler work to improve, and will force them to reorganize so that bad management is not rewarded and it will minimize moral hazard.
GM Bailout Information and Advice
I also feel like if the government simply keeps agreeing to bail out and fund all these companies, then it will just continue to cause more problems, as more companies start to request funding, and the government surges further into debt. I feel like the market is designed to work itself out, and those companies that have been managed well will find ways to survive without such massive assistance from the government. It is the fault of these companies if they didn’t have proper risk management strategies in place to protect themselves from uncertain outcomes. Had a company managed their assets properly and had efficient management, it would most likely be in a much better place in the economy, and would not require $26 billion dollars assistance from the government, like GM and Chrysler are requesting. I found an article focusing on this bailout effort, which did a great job of analyzing the current steps that the government is taking, as well as what it is likely to do in the future. Most likely, the government will continue to help out some, but not all companies, especially given the fact that we do not know how much longer the current crisis is going to last for. It is undoubtedly being felt globally, and it is something that taxpayers are eventually going to have to pay for.
US Bailout Information and Risk
Keval's Blog
Although I do think that the jobs lost by the layoffs of GM and Chrysler would be quite unfortunate, it would not have a huge affect in the general scope of the current economy. If the statistics Keval is giving are accurate, then only 23,000 jobs would be lost from these two companies if the government doesn't keep stepping in to fund these companies. CNN reports that 2.6 million jobs have been lost in 2008, making unemployment rise to 7.2%. Therefore, although these additional layoffs would raise these numbers even higher, it is not a substantial amount compared to many other companies facing layoffs, especially at the cost of 26 billion per company to keep them funded.
CNN: Jobs Lost
Additionally, although the government could continue to help out with funding GM and Chrysler, it is just going to cause the government and the United States to go further into debt, and will cause more and more companies to request monetary assistance. I found an article that specifically deals with the GM bailout and ideas for how it should be approached. The article makes a good point, arguing that the government should not just hand over money to GM and Chrysler, but implement a plan to help out these companies while at the same time making sure they take the effort to restructure and that it doesn’t hurt tax payers. They suggest a “DIP (Debtor-in-Possession)” loan, which will cause less layoffs, let them restructure over 18-24 months, and minimize costs to tax payers since the DIP loan is provided financing directly, or through private financial institutions, and is well protected. I think this plan also seems like it will work well because it will make GM and Chrysler work to improve, and will force them to reorganize so that bad management is not rewarded and it will minimize moral hazard.
GM Bailout Information and Advice
I also feel like if the government simply keeps agreeing to bail out and fund all these companies, then it will just continue to cause more problems, as more companies start to request funding, and the government surges further into debt. I feel like the market is designed to work itself out, and those companies that have been managed well will find ways to survive without such massive assistance from the government. It is the fault of these companies if they didn’t have proper risk management strategies in place to protect themselves from uncertain outcomes. Had a company managed their assets properly and had efficient management, it would most likely be in a much better place in the economy, and would not require $26 billion dollars assistance from the government, like GM and Chrysler are requesting. I found an article focusing on this bailout effort, which did a great job of analyzing the current steps that the government is taking, as well as what it is likely to do in the future. Most likely, the government will continue to help out some, but not all companies, especially given the fact that we do not know how much longer the current crisis is going to last for. It is undoubtedly being felt globally, and it is something that taxpayers are eventually going to have to pay for.
US Bailout Information and Risk
Insurance Contracts: Price and Quality
Recently in class we have discussed insurance contracts at depth, including influences of such things as deductibles, limits, and coinsurance. The one aspect I found most interesting is the fact that most people focus all their attention on price in deciding upon an insurance contract. Most people don’t realize that the quality of an insurance contract is a huge factor that needs to be considered, as it has a strong influence upon them.
For example, I found an article discussing how much time and effort it takes for insurance companies to determine the pricing for their various plans. Insurance companies take a great deal of time to put together these contracts because they have quite complex legal provisions and contractual terms within them. They also often spend millions and millions of dollars on lawyer’s fees and many of them have groups of professionals who are analyzing and amending terms of their contracts to cover any possible outcome.
Therefore, I think that overall people need to be more aware of the details involved in the insurance contracts they are becoming involved in. Many times people simply focus too much on the price and make a quick decision. Most individuals don’t have a great deal of time to get familiar with the contents of an insurance contract and simply glance over a contract before going with it.
Though many insurance contracts one may be looking at will be quite similar – whether this be car, medical, mortgage, life insurance, etc. There are differences between companies, and one should especially pay attention to the quality of them companies – in terms of their financial data, such as the assets they hold, and their investment grade. One also should pay close attention to what exactly is covered in the insurance plan. Many times insurance contracts are drawn up with certain exclusions, and one needs to read closely to see what they really cover. For example, a person may need coverage on something that is excluded, which they could get if they only paid a little bit extra. This is something that needs to be determined before a problem or claim arises. In some insurance contracts there are also some exclusions and conditions that one must meet to keep the policy valid, so this needs to be taken into consideration as well.
I feel like another thing that needs to be taken into consideration more by individuals, is to purchase insurance in the first place. I personally have several friends that don’t have medical insurance, or even car insurance (which is not only dangerous, but also illegal). I found another article that examined the importance of purchasing insurance. This article focused on five groups: health insurance, life insurance, car insurance, property insurance, and casualty insurance. Life is quite unpredictable, and one can’t simply hope that unfortunate events will not occur to them; therefore purchasing insurance provides protection from these things. Though insurance may cost money in the short run, the money it will save in the long run, and the security and peace of mind it provides are certainly worth it.
Necessary Insurance
Understanding Insurance Contracts
For example, I found an article discussing how much time and effort it takes for insurance companies to determine the pricing for their various plans. Insurance companies take a great deal of time to put together these contracts because they have quite complex legal provisions and contractual terms within them. They also often spend millions and millions of dollars on lawyer’s fees and many of them have groups of professionals who are analyzing and amending terms of their contracts to cover any possible outcome.
Therefore, I think that overall people need to be more aware of the details involved in the insurance contracts they are becoming involved in. Many times people simply focus too much on the price and make a quick decision. Most individuals don’t have a great deal of time to get familiar with the contents of an insurance contract and simply glance over a contract before going with it.
Though many insurance contracts one may be looking at will be quite similar – whether this be car, medical, mortgage, life insurance, etc. There are differences between companies, and one should especially pay attention to the quality of them companies – in terms of their financial data, such as the assets they hold, and their investment grade. One also should pay close attention to what exactly is covered in the insurance plan. Many times insurance contracts are drawn up with certain exclusions, and one needs to read closely to see what they really cover. For example, a person may need coverage on something that is excluded, which they could get if they only paid a little bit extra. This is something that needs to be determined before a problem or claim arises. In some insurance contracts there are also some exclusions and conditions that one must meet to keep the policy valid, so this needs to be taken into consideration as well.
I feel like another thing that needs to be taken into consideration more by individuals, is to purchase insurance in the first place. I personally have several friends that don’t have medical insurance, or even car insurance (which is not only dangerous, but also illegal). I found another article that examined the importance of purchasing insurance. This article focused on five groups: health insurance, life insurance, car insurance, property insurance, and casualty insurance. Life is quite unpredictable, and one can’t simply hope that unfortunate events will not occur to them; therefore purchasing insurance provides protection from these things. Though insurance may cost money in the short run, the money it will save in the long run, and the security and peace of mind it provides are certainly worth it.
Necessary Insurance
Understanding Insurance Contracts
Saturday, March 7, 2009
Risk Mapping and ExposureView
After discussing the idea of risk mapping in class I decided to research a bit more about it. I came upon an article about a new software program which completely does this risk mapping process for companies. Including providing them with visual "risk maps" as the ones we viewed in class.
I was thinking about the fact that a company's risks and exposures are constantly changing, so it seems that as soon as they would be able to come up with an appropriate risk map and plan, things could change. A company often will experience unexpected events which could completely reshape and transform their risks. This is especially true given how unstable and unusual the market is in today's economy.
Well, this new software is called ExposureView and it is in particular designed for insurance companies. It lets them visualize the impact of catastrophic events on their portfolios before, during, and after an event. The software is used with range of data including personal and commercial property, workers compensation, and offshore platforms.
ExposureView includes feature called ExposureCube that allows the companies to interact with their data to build and deliver reports instantaneously. Functionality includes "summarizing, filtering, drill-down, roll-up, and standard pivot table features to enable users to quickly create all possible reports from one dataset."
I think what seems great about this program is the company can change the information and data in the system and get instantaneous results. It also seems great that they can enter information to forecast what will happen given certain risks that may happen in the future. It seems like all these things would be much more difficult and time consuming without such a software product.
From searching I did it appears that there are many other risk mapping software programs that have similar functions to ExposureView, including Sobedi and RISK-MAP. Additionally, it appears that many consulting firms take on this role themselves and consult companies on their risks and provide them with similar visuals to physically show them their risks. However, it seems to me like this would be much more expensive for the company. Additionally, this doesn't give them the same benefit as the software does, to have instantaneous results for different sets of data.
Overall, it seems that the process of risk mapping, to identify risks and determine what specific actions should be taken towards these risks, is a very important technique. With constant advancements in technology that we continue to see over time, it appears that this process will continue to get easier and more accurate for companies. This is seen by the creation of the risk mapping software ExposureView, and various other helpful software programs for risk management.
ExposureView Product Information
I was thinking about the fact that a company's risks and exposures are constantly changing, so it seems that as soon as they would be able to come up with an appropriate risk map and plan, things could change. A company often will experience unexpected events which could completely reshape and transform their risks. This is especially true given how unstable and unusual the market is in today's economy.
Well, this new software is called ExposureView and it is in particular designed for insurance companies. It lets them visualize the impact of catastrophic events on their portfolios before, during, and after an event. The software is used with range of data including personal and commercial property, workers compensation, and offshore platforms.
ExposureView includes feature called ExposureCube that allows the companies to interact with their data to build and deliver reports instantaneously. Functionality includes "summarizing, filtering, drill-down, roll-up, and standard pivot table features to enable users to quickly create all possible reports from one dataset."
I think what seems great about this program is the company can change the information and data in the system and get instantaneous results. It also seems great that they can enter information to forecast what will happen given certain risks that may happen in the future. It seems like all these things would be much more difficult and time consuming without such a software product.
From searching I did it appears that there are many other risk mapping software programs that have similar functions to ExposureView, including Sobedi and RISK-MAP. Additionally, it appears that many consulting firms take on this role themselves and consult companies on their risks and provide them with similar visuals to physically show them their risks. However, it seems to me like this would be much more expensive for the company. Additionally, this doesn't give them the same benefit as the software does, to have instantaneous results for different sets of data.
Overall, it seems that the process of risk mapping, to identify risks and determine what specific actions should be taken towards these risks, is a very important technique. With constant advancements in technology that we continue to see over time, it appears that this process will continue to get easier and more accurate for companies. This is seen by the creation of the risk mapping software ExposureView, and various other helpful software programs for risk management.
ExposureView Product Information
Beta (KO vs. S&P 500 Index)
We have discussed the idea of beta and systematic risk a great deal in class thus far. So I decided to put together an example of this using a certain stock and see if I could analyze a bit about the firm and its beta value.
I decided to go with the stock KO (Coca Cola) and using Yahoo Finance was able to find historical returns of the stock over a period of time. I chose to go with September 1, 2008-February 28, 2009 (since this is the most recent 6 month period). I first found the information on a weekly basis for the adjusted closing prices. I did the same with the S&P 500 Index to use this as my comparison for the market values. I found the % change in the closing price for each of the stocks for each week. Below is the Excel sheet I created:
I then put the S&P 500 data vs. the KO data on a scatter plot to try to see the correlation between the stock and the market during this current time period. Below is the scatter plot that I created. I also inserted a trendline to further show this correlation. Excel came up with the equation y=0.6777x + 0.0054 for the line.
From looking at the graph, it shows the equation for the trendline, and since beta is the slope of the line that means the beta for KO for this time period is .6777. Because KO’s beta is less than one, KO is seen to be less volatile than the market (S&P 500).
I also did the above process on a monthly basis for the same time period to see if the results would come out the same or similar for less data points. For that one the equation turned out to be y=0.7568x + 0.0196. So the beta appeared to be larger since it didn't have as many data points to see all the fluctuations that had occurred over the specified time period.
Overall, I think this was a very interesting process to go through. I compared my results to the beta listed on the Yahoo Finance website for KO, and they list beta as .61, so it appears that the beta is pretty close to that in the recent 6 month period. I suppose I thought this was just an interesting thing to see right now given all the unusual circumstances of the market and the US economy as a whole. It was really interesting to be able to work through this and see where that beta value comes from, since it is something we've been discussing in class so much this semester.
Yahoo Finance KO
Yahoo Finance S&P 500 Index
I decided to go with the stock KO (Coca Cola) and using Yahoo Finance was able to find historical returns of the stock over a period of time. I chose to go with September 1, 2008-February 28, 2009 (since this is the most recent 6 month period). I first found the information on a weekly basis for the adjusted closing prices. I did the same with the S&P 500 Index to use this as my comparison for the market values. I found the % change in the closing price for each of the stocks for each week. Below is the Excel sheet I created:
I then put the S&P 500 data vs. the KO data on a scatter plot to try to see the correlation between the stock and the market during this current time period. Below is the scatter plot that I created. I also inserted a trendline to further show this correlation. Excel came up with the equation y=0.6777x + 0.0054 for the line.
From looking at the graph, it shows the equation for the trendline, and since beta is the slope of the line that means the beta for KO for this time period is .6777. Because KO’s beta is less than one, KO is seen to be less volatile than the market (S&P 500).
I also did the above process on a monthly basis for the same time period to see if the results would come out the same or similar for less data points. For that one the equation turned out to be y=0.7568x + 0.0196. So the beta appeared to be larger since it didn't have as many data points to see all the fluctuations that had occurred over the specified time period.
Overall, I think this was a very interesting process to go through. I compared my results to the beta listed on the Yahoo Finance website for KO, and they list beta as .61, so it appears that the beta is pretty close to that in the recent 6 month period. I suppose I thought this was just an interesting thing to see right now given all the unusual circumstances of the market and the US economy as a whole. It was really interesting to be able to work through this and see where that beta value comes from, since it is something we've been discussing in class so much this semester.
Yahoo Finance KO
Yahoo Finance S&P 500 Index
Risk Assessment and Looking for Exposures
Recently in class we have been discussing a lot of things regarding risk assessment of exposures for a company. Therefore I decided to research more about this process of risk management and see exactly how companies go about it. I found a PowerPoint Presentation from the University of Illinois that had a lot of great information.
One of the first things I found interesting was the following chart:
As discussed in class, some ways that it can be determined if these exposures are acceptable, uncertain, or unacceptable is through various processes. This can include looking through financial statements, analyzing internal company pro forma statements, looking at organizational charts, or even risk mapping.
Another interesting thing I read in this UIC PowerPoint Presentation was the view that risk assessment and management is “not an objective scientific process; facts and values frequently merge when we deal with issues of high uncertainty; cultural factors affect the way people assess risk.” This is definitely something we have touched on in class, and I think it is a very important thing to remember in looking at how different companies deal with different risks. Though there are many mathematical and scientific approaches to understanding why companies may view some exposures as more important than others, a great deal of it also has to do with the individual values and culture of the company. Many companies are different and value different things, so as much as none of them are going to like losing cash flows due to a risk factor, they will be accepting of it to different degrees based on the foundation of the company.
UIC PowerPoint Presentation on Risk Assessment and Exposure
One of the first things I found interesting was the following chart:
This was interesting to me because it gives a clear picture of a formal process companies go about for analyzing their risks and determining if they are acceptable or not. As you can see some risks may be acceptable for the time being (since no company can be completely risk free), but these exposures definitely need to be reevaluated to insure they are still acceptable over time. Other exposures may be unacceptable and therefore require control in the form of various risk management techniques.
As discussed in class, some ways that it can be determined if these exposures are acceptable, uncertain, or unacceptable is through various processes. This can include looking through financial statements, analyzing internal company pro forma statements, looking at organizational charts, or even risk mapping.
Another interesting thing I read in this UIC PowerPoint Presentation was the view that risk assessment and management is “not an objective scientific process; facts and values frequently merge when we deal with issues of high uncertainty; cultural factors affect the way people assess risk.” This is definitely something we have touched on in class, and I think it is a very important thing to remember in looking at how different companies deal with different risks. Though there are many mathematical and scientific approaches to understanding why companies may view some exposures as more important than others, a great deal of it also has to do with the individual values and culture of the company. Many companies are different and value different things, so as much as none of them are going to like losing cash flows due to a risk factor, they will be accepting of it to different degrees based on the foundation of the company.
UIC PowerPoint Presentation on Risk Assessment and Exposure
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