EDPN Conference Valuation and Risk Analysis. Structural Risk: concept and application

Transcription

1 EDPN Conference 2012 Valuation and Risk Analysis Structural Risk: concept and application

2 Today: enpv We should not use enpv / real option analysis for large decision containing risk Because it will give a too positive value estimate Disclaimer: I m not going to kill valuation methodology only its use

3 Your burning platform presenter: Jesper Lyng Jensen Risk consultant The capital region Hospital projects Research in ressource risk & financial risk Consulting Risk Management Financial analysis Risky Business

4 I have 20 minutes So I will have to stay at the conceptual level Now about structures

5 An analytical structure in this context relates to definite structures on which we can apply analysis, and which we by applying analysis make complementary to other structures Evaluation tools structure structure A company or a super structure

6 An analytical structure And we have portfolio tools VaR etc But they don t change the value of the assets (but admittedly they do change the value of the company) Evaluation tools structure structure A company or a super structure

7 The Problem A property of risk is to cause cost future cost Risk = future cost We see it all the time i.e. in construction, project development etc. could future cost break down the structural integrity?

8 The Problem How would this look? We named this the red phone problem of risk

9 The cold war red phone is a symbol of pending loss

10 The problem Through the red phone problem, The sandals can cause a cost in the shoe structure. Future risk related loss Future risk cost structure structure A company or a super structure

11 In an experiment it looks like this Based on a industry operating on the capacity limit of its phone system Average value pr turn 80,0 70,0 60,0 Value 50,0 40,0 30,0 With trade No Trade Theoretical Max at full funding Sim of 1000 runs 20,0 10,0 0, Turn

12 What does the litterature say Bowmans paradox Bowman, E. H A risk return paradox for strategic management. Sloan Management Review 21 (3): Froot Froot, K. A., Scharfstein, D. S., Stein, J. C A framework for risk management. Harvard Business Review 72 (6) : Graham & Dodd Menjamin Graham & David L. Dodd, Security Analysis, 2002 p. 106 For the value investort An investment operation is one upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative

13 Take home message As decision professionals we have a burning platform! For singular large investments containing risk, enpv cannot be used, unless a financial stress test is passed For repeated large risk investments, a financial steess test aimed at ressource markets should be passed For decision makers who dont use enpv, your project cost estimates will be too low, unless you pass at financial stress test Status: As decision professionals we are left with no credible valuation tool, when the future contains red phones

14 How does a (financial) stress test look? Case Coloplast R&D Ressource period 1 Ressource period 2 Cost Cost Coloplast R&D did not pass the test, and project values were not intact

15 Thank you for your attention Question: Should we as decision professionals embrace the financial stress test? Further reading: Risk Management (2012) 14, : Risk, resources and structures: Experimental evidence of a new cost of risk component The structural risk component and implications for enterprise risk management Jesper Lyng Jensen a, Claus Due Ponsaing b and Sof Thrane c Working paper: Risk and return; the red phone problem of risk in a group of agents Jesper Lyng Jensen, Jens A.B. Winther, Claus Due Ponsaing

16 The future Uncertainty Uncertainty Risk Risk Structural risk