Book reviews

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Risk and Financial Catastrophe

Erik Banks, Palgrave Macmillan, 2009

Risk and Financial Catas-trophe’ presents an in-depth discussion of the nature and consequences of financial disasters and the pragmatic solutions that must be considered in order to cope with such crises in the future. This highly topical book tackles technical issues in a readable, non-mathematical way and presents the subject in a practical light with the use of eight case studies of market-wide, international catastrophes.

The book is divided into three parts:

Part I, The Nature of Catastrophe, sets the stage by presenting a taxonomy of risk and placing non-catastrophic and catastrophic exposures into an overall framework. This section also considers the unique properties of catastrophe, exploring both natural and man-made events in relation to frequency, severity and financial impact, as well as the specific nature and formation of financial disasters and how individual institutions, and the financial system at large, respond to such crises.

Part II, The Risk Framework, presents the processes commonly used in the corporate world to deal with risks, noting how such processes may be suitable for non-catastrophic events, but not for extreme events. This section also considers a series of techniques, tools and models that are available to help quantify catastrophic risk, illustrating their use in a practical sense while also analysing their limitations.

Part III, Practical Management, moves into the practical dimension of the topic by analysing a series of past disasters including the emerging debt crisis of the 1980s, the October 1987 crash, the Japanese banking crisis of the 1990s, the Southeast Asian crisis of 1997, the Russia/LTCM dislocation of 1998 and the credit crisis that began in 2007. It considers lessons learned, and then proposes a series of prescriptive measures to cope with future disasters.

ERIK BANKS is responsible for group market risk and investment banking credit risk at the European universal bank UniCredit. Over the past 23 years, he has held senior risk positions at Citibank and Merrill Lynch and in the hedge fund sector in New York, Tokyo, Hong Kong, London and Munich. He is the author of more than 20 books on risk, derivatives, emerging markets and governance.

 

Strategy, Value and Risk: The Real Options Approach, Second Edition

Jamie Rogers, Palgrave Macmillan, 2009

The surge of innovation in information technology at the end of the twentieth century reduced the cost of communications, which facilitated the globalisation of production and capital markets. Globalisation has in turn spurred competition and consequently innovation.

Sustainable competitive advantage is an increasingly difficult proposition in this environment, a fact which raises a number of issues for organisations such as how to create and manage value, how to improve an organisation’s capabilities to respond and adapt, how to manage the effect of competition on industry structures and how to foster and manage innovation.

In response to these issues, the concept of ‘real options’ is having an impact and influence on organisations. Real options is a form of advanced financial analysis that applies financial options theory to real assets. The concept offers a framework that can link value to risk and uncertainty, and the ability to manage the strategic opportunities that lie in an increasingly dynamic environment. This book, for practitioners and academics alike, illustrates the issues with detailed case studies. 

JAMIE ROGERS is an executive director at The Weston Group, a merchant bank based in New York. He has extensive experience in a range of areas that include valuation and risk management in the financial, energy and commodity markets, corporate finance and derivatives.