Statistical Techniques for Risk Analysis

The idea of “risk” is used in many fields and industries. There has been large efforts made towards the understanding of risk. Since, risk varies so much depending on the field of study, the need for learning about it is warranted. As can be imagined, the importance of risk in a market economy is crucial. In the 1990s, JP Morgan made the Value at Risk (VaR) a central component of its work efforts (Cecilia-Nicoleta, Anne-Marie, & Carmen-Maria, 2011).

1) Whether the risks that Adair faced were inherent in the activity of rock climbing?

elasticity of demand as your guide. c) Assess how the price elasticity of demand impacts the firm’s pricing decisions and revenue growth. IV. Examine the costs of production for your firm. a) Analyze the various costs a firm faces, their trends over time, and how they have impacted your firm’s profitability. b) Apply the concepts of variable and fixed costs to your firm for informing its output decisions. For instance, analyze how different kinds of costs (labor, research and development, raw materials)

Explain the corresponding impact on total revenue for each of the three price ranges identified in part G.

The components are essential to predicting profit margins and measuring the success of the company. Each component has an effect on profits. Lesser volume, increased cost per unit, and reduce sales would

2.5 Analyze the relationship between productivity and the cost of production. 2.6 Analyze the effect of changes in the supply of and demand for factors of production on the price of inputs. 2.7 Analyze the effect of changes in marginal revenues and costs on a firm’s profit-making potential.

Homework 2 Solution, Fin 500Q, Quantitative Risk Management 1. Assume gold price risk is diversifiable, and the riskless rate is 5%. A firm produces a unit of gold a year from today. Assume all interest is compounded annually and is tax deductible. The price of gold is either $500 or $200, each with probability 0.5. Suppose the firm pays taxes at a rate of 40% for all its cash flow in excess of $300. The value of the firm is the expected discounted value of its cash flow less the expected discounted value of bankruptcy costs and taxes that it pays. The firm can hedge by buying/selling forward contracts on gold. Start by assuming that bankruptcy costs are zero. (a) Find the value of the unhedged unlevered firm. (10 points) Answer: 1 · [350 − 0.5 ·

An alternative method for determining the profit-maximizing quantity is to determine where marginal costs equal marginal revenue. Instead of calculating profits for each level of sales, total variable costs and total revenue are calculated. Marginal costs and marginal revenues are calculated in the same manner as marginal profit, thereby determining the amount of change for each level of sales (Huter, 2012, p.2).

Risk refers to a likelihood, probability, a chance that a loss may occur in a given organization. Most of the times, there is a high risk when there is vulnerability. In this case, vulnerability refers to a weakness that the organization has. Risk assessment refers to the process of identification of potential hazards and proper analysis of the expected losses if those hazards occur (Homeland Security, n.d.). Risk assessment as a way of profiling risk according to impact to the organization. Some organizations have business impact analysis exercises geared towards determination of potential hazards based risk assessment approaches. Organizations’ risk differ depending on the size and the type of business they are doing. The disparity in organizations’ risk call for different adaptation of risk assessment approaches. Even with the disparities of the businesses, proper risk management not only ranks the risks according to the seriousness but also identifies the best methods to control risks in an organization.

The indicator that results in total revenues being equal to total cost is called the

The following observation will describe the decisions made by a financial analyst who is working for the capital budget department at Caledonia Products. The organization has asked Team B to evaluate the potential risk involved in an upcoming transaction and identify several options in how to proceed. Because this is the team’s first assignments dealing with risk analyzes the team has been ask to further explain the details. The organization analysis will focus on free cash flows, projection of cash flows, projects initial outlay, cash flow diagram, net present value, internal rate of return, and if the

Simulation is a computer process that gives a probable NPV or IRR for a project. All factors that affect the project’s returns are input. The computer then randomly selects one observation from each category. All of the observations are combined and the NPV or IRR is calculated from those figures. Simulation gives a range of outcomes as well as the probability of the outcomes. It provides the total risk level of a project.

The overall method used to calculate the expected value of the net present value of the project is to first calculate the real weighted average cost of capital of the firm, use the

Concept of risk, risk assessment, risk management and how uncertainty affects the process will be discussed.

The following paper analyzes a project from financial perspectives using the capital budgeting techniques like Net Present Value (NPV) and Internal Rate of Return (IRR).