Risks in Financial Decisions - Investment Decisions, Business Economics & Finance | Business Economics & Finance - B Com PDF Download

Understanding the organisation’s risk appetite and attitudes is critical context to financial decision making ...

... where risk capital corresponds to agreed points on the aggregate loss distribution

* Economic capital confidence interval is generally a function of the organisation’s target debt rating

A risk assessment will assess the potential risks associated with a decision across relevant risk classes, and time horizon

Base cash flows should reference the “mean”, not mode, and be suitably adjusted for implementation risk

Cost of Capital should be recognised:
* primarily through a risk-based Economic Capital lens
* by forecasting an explicit annual “Capital Charge”
 „ Some “secondary” capital lenses through which to consider the financial decision might include:

•  regulatory 
• physical book 
• target 
•  liquid 
•  etc.

Example: same cash flow but different risk adjusted value

Where cash flows are adjusted for risk, then the appropriate RDR for these cash flows would be the risk free rate

Where cash flows are adjusted for risk, then the appropriate RDR for these cash flows would be the risk free rate

• However this requires: 
•  decomposing revenue and cost cash flows into components that are affected by each individual underlying risk type 
•  deriving or assuming a statistical distribution for each risk type 
•  understanding the correlations that might exist between these various risk types

Communicating results of the financial assessment of initiative(s) should provide transparency around the manner in which adjustments for risk have been made