Risk Finance and Asset Pricing: Value, Measurements, and Markets

CHAPTER 1

Risk, Finance, Corporate Management, and Society

OVERVIEW

Financial engineering is a profession that bridges theoretical finance and financial practice. It spans the many occupations prevalent in financial services. This chapter provides a nonquantitative introduction to financial management and risk engineering. Terms such as risk, uncertainty, securities, bonds, derivatives, options, and the like are defined and their applications to a broad number of financial concerns outlined. Terms such as trading, investing, speculating, credit, leverage, environmental finance, securitization, and others are defined and applications considered. Real-life financial problems, including safety, reliability, claims, insurance, your pension, and so forth, are highlighted to emphasize the relevance of financial analysis and management to everyday life. Finally, outstanding financial issues, a growing concern for financial ethics, and regulation are also discussed. This chapter may be covered singly or together with the next chapter in one or two lectures with students reading and commenting on the issues the chapter raises.

RISKS EVERYWHERE—A CONSEQUENCE OF UNCERTAINTY

Uncertainty is part of our lives. Its presence underlies our attitudes, our search for information, and the efforts we expend to mitigate and manage its positive and adverse consequences. To do so, we seek definitions, measurements, and the quantification of uncertainty in order to analyze the risks, protect ourselves ...