The Art of Risk Management

Risk expert Christopher Culp begins by laying down a solid foundation in corporate finance and the processes by which firms strive to find the elusive "optimal capital structure." Culp introduces competing theories on optimal capital structure and provides a summary of empirical evidence for and against these theories. Risk and signaling capital, as well as regulatory capital, round out the discussion of the quest for optimal capital structure.

To understand the motivations behind ART–many of which appear to be tied to the search by firms for optimal capital structure–Culp then probes the most interesting ART transactions to date by exploring their impact on the capital structure of many actual companies.

This comprehensive guide also provides a valuable overview of the risk control and capital structure functions provided by banking products, derivatives targeted at market and credit risk, asset divestitures and securitizations, and insurance and reinsurance. Also discussed are the many similarities between these traditional risk management products, especially (re-) insurance and options. Moving from traditional methods to today's most cutting-edge risk management and capital formation tools, The ART of Risk Management examines the emerging market for ART forms based on their type and function. You'll be introduced to the world of ART by looking at two distinct parts of that world: risk finance and risk transfer. You'll learn about major structures in each, including such risk financing methods as captives, protected cell companies, and finite risk products, and risk transfer methods, including multiline and multitrigger programs, "committed capital," and alternative risk securitization.

The final section of this invaluable resource presents some practical issues that ART product users will want to take into consideration. Guest contributors address catastrophic insurance products, weather risk transfer, patent law and ART financial innovation, and ART structures facilitating mergers and acquisitions.

Contents

Acknowledgments.
Preface: A Comprehensive Approach to Corporation Finance.

PART I: THE QUEST FOR OPTIMAL CAPITAL STRUCTURE.

Chapter 1. The Nature of Financial Capital.
Chapter 2. A Securities Perpspective on Capital Structure.
Chapter 3. When is Capital Structure Irrelevant?
Chapter 4. The Benefits and Costs of Debt and the "Tradeoff Theory" of Optimal Capital Structure.
Chapter 5. Asymmetric Information Adverse Selection and the "Pecking Order Theory" of Optimal Capital Structure.
Chapter 6. Distinguishing Between Optimal Capital Structure Theories.
Chapter 7. Risk and Signaling Capital.
Chapter 8. Regulatory Capital.

PART II: CAPITAL STRUCTURE AND RISK MANAGEMENT.

Chapter 8. A Vocabulary of Risk.
Chapter 10. Risk Management as a Process.
Chapter 11. Risk Management and Capital Structure.

PART III: CLASSICAL RISK TRANSFORMATION PRODUCTS.

Chapter 12. Commercial Banking Products.
Chapter 13. Derivatives.
Chapter 14. Asset Disposition and Securitized Products.
Chapter 15. Insurance.
Chapter 16. Reinsurance.

PART IV: ALTERNATIVE RISK TRANSFER PRODUCTS.

Chapter 17. Alternative Risk Finance vs. Alternative Risk Transfer.
Chapter 18. Alternative Risk Finance: Self-Insurance, Captives, and Captive-Like Structure.
Chapter 19. Alternative Risk Finance: Finite Risk Products and Solutions.
Chapter 20. Integrated Multi-Line and Multi-Trigger Alternative Risk Transfer Products.
Chapter 21. Committed Capital and Guarantees.
Chapter 22: Alternative Risk Securitizations and Securitized Products.

PART V: PRACTICAL CONSIDERATIONS FOR WOULD-BE ARTISTS.

Chapter 23. USAA Prime: ChoiceCats for Diversifying Investors (Morton Lane).
Chapter 24. The Emerging Role of Patent Law in Risk Finance (J. B. Heaton).
Chapter 25. Weather Derivatives or Insurance? Considerations for Energy Companies (Andrea S. Kramer).
Chapter 26. The Convergence of Insurance and Investment Banking: Representations & Warranties Insurance and Other Insurance Products Designed to Facilitate Corporate Transactions (Theodore A. Boundas and Teri Lee Ferro).

References.