Exercise 2

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EXERCISE 2 (INDIVIDUAL) Categorize the following risks by source. Event 1: Hopeless Bank is about to go under. For 80 years, it has steadily grown based on a business of lending exclusively to the businesses run by members of the 5 most powerful families in the area. Last month, it was revealed that one of the families had been defrauded of all their wealth and is now bankrupt, with no remaining collateral. The outstanding loans from that one family represents more than all the bank capital. (The risk to be categorized is from Hopeless Bank’s perspective.) Event 2: Suddenly, Hiroshi Insurance has a problem. For the past 10 years, they had been successfully offering insurance on airline flights purchased through HamiltonCard. Every HamiltonCard user that bought an airplane ticket would automatically be given, and charged for, life insurance coverage which pays benefits in the event of a plane crash. But, unexpectedly, HamiltonCard just informed Hiroshi that when their 10-year contract is up for renewal, they will be distributing Cheapest Insurance’s products for this program instead of Hiroshi’s. This program had accounted for about one-third of Hiroshi’s revenues last year. Hiroshi immediately fired its relationship manager for the HamiltonCard program. (The risk to be categorized is from Hiroshi’s perspective.) Event 3: Hermione Delivery is located downtown adjacent to a federal building in a major U.S. city. Yesterday, a terrorist car bomb exploded just outside the federal building, completely destroying both the federal building and Hermione’s headquarters. Virtually all of Hermione’s top management, including its top 25 salespeople, were killed in the blast. It was unusual for such a concentration of key employees to be present at Hermione’s headquarters, but they were hosting a special event in their largest meeting room, which was closest to the location of the bomb. Event 4: JX Entertainment has a quirky habit of making risky bets on market sectors, from time to time, but almost always wins. The CFO always gets nervous when the CIO takes these bets and has warned of the massive concentration risk this involves. The bets usually consist of investing 50% of all of its assets in bonds issued by the top 3 players in a given industry sector. This year, the bet has been on drug companies heavily focused on one type of cancer, which just this week became irrelevant, due to an unexpected cure discovered by medical science. These drug companies are now having trouble issuing debt securities and have had to raise the interest rate offered on their new issues. (The risk to be categorized is from JX’s perspective.) Event 5: CloudBank’s plans to expand its market share in auto loans have not gone well, as a result of an increase in competition from other banks that have gotten more aggressive in their loan rates. Unwilling to accept lower profit margins, ClousBank has decided to rethink their strategy. Copyright © SimErgy. All rights reserved.

EXERCISE 2 (INDIVIDUAL) Name: Xintong Li (xl3320) EVENT Category Sub-Category Reason 1 Financial Credit Unexpected changes to one of the families that Hopeless Bank has extended credit. The family is no-longer creditworthy for Hopeless Bank and could not pay back loans due to bankruptcy. 2 Strategic Strategic Relationships Unexpected change in the strategic relationships between Hiroshi Insurance and HamiltonCard. The relationship manager at Hiroshi failed to maintain a continuous relationship with HamiltonCard. As a result, instead of offering Hiroshi Insurance’s product, HamiltonCard will be offering Cheapest Insurance’s product. 3 Operational Disaster Unexpected man made disaster (terrorist car bomb) that ‐ killed Hermione’s top management and salespeople. 4 Financial Market Unexpected changes in the drug market, making the interest rates on the debt securities higher than expected. (It could also be related to Strategy-Governance because the CIO’s investment strategy is risky and not governed as expected.) 5 Strategic Competitor Unexpected change in competitive landscape for CloudBank since other banks have more aggressive loan rates. Copyright © SimErgy. All rights reserved.

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