Treasury Management International
Risk Management
Page 1 of 2
The SLG Portfolio-Risk-Index - Or Why Correlation is Useful in Visualising Risk Management
by Georg Ehrhart, Partner, Market Risk Management & Research, Schwabe, Ley & Greiner
We all know that correlation is a statistical method to express the relationship of data and their movements, for example, the movement of the EUR/USD-spot rate versus the price of oil. Or, in other words, correlation helps you to find out whether the total risk in your portfolio is less than the risk of all individual factors added together, because sometimes the price of one risk can go up more strongly than the price of another risk (or may even decline at the same time). Once you are calculating such effects you need to work out the correlations of all risk factors in your portfolio. This is the number-crunching part which needs to be done in a concise, secure and efficient way, and which we do for our clients for more than 1,000 risk factors by way of a daily, weekly or monthly individual service. These data are then imported into their treasury systems.
The result of this can be visualised in the new Portfolio-Risk-Index, a monthly index which Schwabe, Ley & Greiner (SLG) has started to publish.
The PRIX is a composite index integrating both traded financial and commodity risks. Imagine your company producing in the Eurozone and Hungary needing aluminium, pulp and plastics, electricity and oil. One-third of your sales is in USD and your bank debt is largely based on variable interest rates.The PRIX shows how these risks taken together – based on the exposures and considering their correlation – have developed over time.
In Figure 1, you can see how the company's total risk soared during 2008, declined until June 2010 – and then started to increase again.
In a second step you can relate this trend to your risk capacity, e.g., to an index reflecting your earnings before interest and tax (EBIT) (see Figure 2). You may note that your total risk has become proportionately even larger since your EBIT may have declined in the same time – thereby reducing your risk capacity. This should send an alarm signal to the CFO.
|
Save PDFs of your favorite articles, authors and companies. Bookmark this article, or add to a list of your favorites within mytmi. |
|
 Share this article |  Share article on LinkedIn
|
 Share article on Facebook
|
 Share article on Twitter |
|
Article by Georg Ehrhart Partner, Market Risk Management & Research, Schwabe, Ley & Greiner |
Related Articles
FX Industry at Regulatory Crossroads
Cash Management in Argentina: A Solid System but Needs Fresh Air
Quarterly Survey Reveals Treasurers’ Uncertainty
The SLG Portfolio-Risk-Index – or Why Correlation is Useful in Visualising Risk Management
Treasury Management International showcases topical, pragmatic solutions and strategic insights on treasury, cash management, foreign exchange and other issues affecting treasury and financial professionals, together with treasury and finance news, education and opinion. With real-life treasury management experiences and case studies at its core, TMI provides valuable material for all practitioners - from experienced treasurers and CFOs to those new to the profession.
ADVICE TO READERS
While all reasonable care has been taken to ensure the accuracy of the publication, the publishers cannot accept responsibility for any errors or omissions. All rights reserved. No paragraph or other part of this publication may be reproduced or transmitted in any form by any means, including photocopying and recording, without the written permission of Treasury Management International Ltd or in accordance with the provisions of the Copyright Act 1956 (as amended). Such written permission must also be obtained before any paragraph or other part of this publication is stored in a retrieval system of any kind.
© P4 Publishing Ltd
Registered in England and Wales Number: 05838515
Design by Greenfisher | Web Development by RedGreenBlue
