Explore Risk Foundations with two practices questions. The blog is meant to give you a 3-min boost; I am writing answers to the Jorion Chapters up to our wiki reference; feel free to add to the discussion! David Harper

Jorion 1.1

Assume that General Motors loses money in three scenarios:
(a) a depreciation in the value of the euro exchange rate
(b) the cost of recalling and repairing defective automobiles
(c) missing out on a major automobile segment, which is that of hybrids (cars operating on two sources of energy).

Which of these risks can be defined as business, strategy, and financial risk?

Jorion 1.2

"Financial risks can be analyzed independently of each other.  For instance, a stock analyst does not need to worry about oil prices because these are different markets."  Comment.

Our answers: Jorion 1.1 and Jorion 1.2

Comments

1. David Harper, CFA, FRM, CIPM 20 Apr 2009

   Great, thank you. I admit I previously sort of glazed over this interdependence “cliche” but lately I am thinking it’s where much of the important action and study takes place; e.g., how does the credit risk component of a credit default swap (CDS) interact with the market risk of the same instrument.

   Or, even more timely, the link between micro risks and macro (systemic risks). IMO, the defenders of CDS as harmless often make their case on the theory of a single intstrument (as merely transferring risk from one counterparty to another). But then, via fallacy of composition, they deem the CDS as systemically harmless. But the issue seems to be: are new risks created as the systems level, risks greater than the sum of its parts. 

   David

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