On Risk Management

Mohamed E. Hussein

BOOKS REVIEWED:

Tavakoli, J.M. 2001. Credit Derivatives & SyntheticStructures. New York: JohnWiley & Sons, Inc.

Bowden, A.R., M.R. Lane,and J.H. Martin. 2001. Triple Bottom Line Risk Man-agement. New York: JohnWiley & Sons, Inc.

The global business envi-ronment has witnessed anincrease in financial,

operational and environmentalrisks. As a result, companieshave to develop sophisticatedstrategies to deal with all thesetypes of risks. Companies alsofind that it is more efficient tocreate integrated risk manage-ment systems to manage finan-cial, operational, and environ-mental risks. The market hasresponded by creating all typesof products to help companiesmanage those risks. In thefinancial markets, productssuch as derivatives, swaps, andoptions are offered to managecredit risk, price risk, and

exchange risk. These two booksdiscuss products, systems, andstrategies of risk management.

CREDIT DERIVATIVES &SYNTHETIC STRUCTURES

This book describes thedifferent types of credit deriva-tives in a style understandableto the lay reader. Its approachis to help prevent market prac-titioners from getting baffledby jargon, equations, and dia-grams. It advises market par-ticipants to bring their experi-ence to bear and ask a fewquestions. According to theauthor, the book’s philosophyis “that the timing of cashflows, the magnitude of cashflows, and the certainty ofcash flows determine value.Relative value is further deter-mined by regulatory, account-ing, tax and risk profile con-straints” (p. 1).

The author uses a set ofquestions about cash to evalu-ate all types of financial prod-ucts: How much cash will Iget? When will I get the cash?How certain am I that I will

get the cash? Are there anygovernment regulations thatmake me better off? Is therean accounting method thatmakes me appear better off?Can I use less capital toimprove my rate of return? Isthere a tax regulation I can useto my economic advantage?How much of the cash do I getto keep? The book presents amode of analysis that helpsanswer these questions aboutcredit derivatives.

The book has nine chap-ters. Chapter I reviews thecredit derivatives market.Chapters II through VIIdescribe the different types ofcredit derivatives and struc-tured products including sover-eign risk and emerging mar-kets. Chapter VIII coversdocumentation, regulatory, andlegal issues. Chapter IX reflectson the future of the market.

The author is executivedirector in the credit derivativesgroup at Westdeutsche Landes-bank in London. She has anMBA from the University ofChicago, where she was anadjunct associate professor in

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83© 2001 John Wiley & Sons, Inc.

the finance department andtaught a course entitled “Deriva-tives: Futures, Forwards,Options, and Swaps.” The bookis well written and reflects theauthor’s vast knowledge andinternational experience.Although the book is writtenwith the lay reader in mind, itrequires a basic understandingof finance and economicsknowledge. More simple illus-trations and examples wouldhave made the book accessibleto a wider readership. MertonH. Miller, winner of the NobelPrize in economics, praised thefirst edition of the book. Thebook can be used in an MBAfinance or accounting course, aswell as in professional training.

TRIPLE BOTTOM LINE RISKMANAGEMENT

This book is written bythree consultants to presenttheir company’s risk manage-ment model, called Risk Identi-fication and Strategy UsingQuantitative Evaluation(RISQUE). The authors believethat risk management processescan be used to optimize busi-ness practices and that a quan-titative model such as RISQUEis “a sound, defensible, trans-parent process that is very use-ful for development of riskmanagement strategies.”

RISQUE is a multifacetedapproach that is designed to

help managers make informedand defensible risk manage-ment decisions as part of atriple bottom-line managementstrategy. The triple bottom lineencompasses financial, envi-ronmental, and social accounta-bility. RISQUE incorporates aquantitative risk assessmentprocess that translates theintangible or nonquantifiableenvironmental and social risksinto financial measures.RISQUE process is made offive stages. In the first stage,the context and assessment cri-teria are established. In the sec-ond stage, risk events are iden-tified, the likelihood isestimated, and consequencesare identified. In stage three,risk analysis is performed. Instage four, the strategy is devel-oped. In stage five, the strategyis implemented.

The book outlines threetypes of risk assessments:qualitative risk assessments,which the authors believe isuseful for the screening ofbusiness risks into acceptableand unacceptable risks but isnot enough to develop a com-prehensive strategy and actionsfor risks; semiquantitative riskassessments, which can beused to derive a more detailedand prioritized ranking of risksthat cannot be derived usingqualitative risk assessments;and quantitative risk assess-ments, comprehensive assess-

ments that can be used todevelop detailed risk profilesand estimate potential costs asa basis for benefit-cost analy-sis. RISQUE’s advantage isthat it incorporates all threetypes of risk assessment.

The book has 17 chapters.The first two chapters discussthe risk management processand make the case for usingquantitative risk assessment.Chapters 3 through 9 presentthe RISQUE model. Chapters10 through 17 present cases ofthe model’s implementation.The cases include companiesfrom several industries such asmining, tourism, power, landdevelopment, insurance, andwaste management. The topicsof the cases include projectselection, acquisitions, intangi-bles, community safety, finan-cial assurances, and compli-ance with corporate reportingregulations. The cases arefrom Australia, New Zealand,Papua New Guinea, and theUnited States.

The book is well writtenand makes an excellent use ofcharts, graphs, and tables. Asthe authors have suggested, thebook is useful to managersmaking decisions about risk.Managers can use it to developtheir own strategies or to deter-mine terms of reference forconsultants. It can be read inde-pendently or used in profes-sional training courses.

84 The Journal of Corporate Accounting & Finance

© 2001 John Wiley & Sons, Inc.

Mohamed E. Hussein, Ph.D., is professor of accounting at the University of Connecticut at Storrs,Connecticut. Dr. Hussein has taught in the university’s undergraduate, MBA, EMBA, and doctoral pro-grams. He was the Andersen Consulting Faculty Fellow at the university, and he has served as resi-dent director of the university’s Program in European Studies, at the University of Maastricht, in TheNetherlands. His research has been published in a variety of professional and business journals.