Contingent Risk and Policy Issues

The aim of this course is to introduce students to accounting and finance problems which face organsations at board level and to enable them to feel at ease working with finance and accounting experts as and when necessary.

By the end of this course, students will have a grasp of the fundamentals of financial analysis and corporate financial theory and will know how to tackle the main financial problems they are likely to encounter in the work environment. The financial issues discussed will be those relevant in the private and public sectors and will also be relevant in a global context.

Financial Strategy covers financial statement analysis, the cost of capital, project appraisal, company valuation, foreign exchange and interest rate markets, management and investor performance measures.

On completing this course, managers should be able to:

• appreciate the financial strategy issues affecting organisations
• understand the relevance of finance and accounting both within the organisation and to stakeholders in organisations
• undertake a financial analysis of an organisation and be able to interpret the results in the context of lending and investing decisions
• make investment decisions, both for projects and companies
• be aware of the financing choices available to organisations and how financial structure should be determined
• assess the financial risks facing organisations, in particular credit, interest and foreign exchange risk, and adopt risk hedging strategies which suit the risk profile of the organisation concerned
• understand how organisations measure financial performance internally and how their financial performance is assessed by stakeholders in a global context
  

1. Introduction
• Aims and objectives of the unit
2. Contingent Risk
3. Options
• 3.1 Options — Where Did They Come From?
• 3.2 Options on Shares
4. Analysing Options
• 4.1 Pay-Off Diagrams
• 4.2 Arbitrage and Free Lunches
• American and European options
5. Option Valuation
• 5.1 Valuing Options on Shares
• The Black-Scholes formula
• What are the important variables?
• S – K, the difference between the current price and the exercise price
• σ, the volatility
• t, time to expiry
• r, the risk-free interest rate
• 5.2 Currency Options
• Valuing currency options
• 5.3 Examples and Cases Using Options
• An example of the use of currency options
• Where to use currency options
6. Risk and Policy
• 6.1 Examples of Risk Policy
• Boots
• Blue Circle
• Carlton Communications
• 6.2 Elements of Policy-Setting for Risk Management
• An example; the role of trustees in fund management
• 6.3 Video Case Study and Reading

• Appendix: Proofs of Propositions Concerning Option Valuation
• Proposition 1
• Proof
• Proposition 2
• Proof
• Proposition 3
• Proof
• Proposition 4
• Proof
• Proposition 5

MBA material, so what do you expect?