An Ingtegrated Approach to Risk Management - CHAPTER 4

This is a 1999 draft of a chapter in a text book tentatively titled This is a 1999 draft of a chapter in a text book tentatively titled "Derivatives, Risk Management, and Financial Engineering" . This chapter deals with issues of risk management as they affect the financial evaluation of assets and liabilities. The objectives of the chapter are: Introduce risk measures appropriate to financial and nonfinancial firms. Define value at risk (VaR) and cash flow at risk (CaR) Show how to use VaR and CaR to make investment decisions. Demonstrate the use of VaR and CaR to evaluate the profitability of existing activities of a firm. Discuss the limits of risk management.