Exercises
Chapter 3. ERM Contributions
1. Do you agree that a missed opportunity a “risk?” Explain.
2. Do you agree that every risk should have a risk owner? Explain.
3. With respect to the Ford Motor Corp. exposure to the rare metal palladium, what is the ERM lesson learned?
4. Do you agree that every risk should be aligned with the business model? Explain.
5. Do you agree that every organization should establish a central risk function? Explain.
6. Do you agree that every organization should create a high-tech platform for ERM? Explain.
7. How would you involve the board in enterprise risk management if you were the CEO of an organization?
8. With respect to the story of the grocery chain acquisition, what is the ERM lesson learned?
9. With respect to the story of Home Depot, what is the ERM lesson learned?
Chapter 5. Challenge of the 2008 Financial Crisis
1. What does the NASDAQ Index tell us about the start of the 2008 financial crisis?
2. In 2000, AOL and Time Warner merged with AOL shareholders receiving 55% of the stock of AOL Time Warner. What was the ERM lesson from the merger?
3. Steven Levitt describes a man who delivered bagels under an honor system. What is the ERM lesson from the story?
4. Some observers believe that the banks that made loans, and then immediately sold them, were the best risk managers during the 2008 financial crisis. Do you agree?
Explain your answer.
5. Steven Levitt describes a blood bank that experienced a decrease in the level of donations. Aside from economic and moral incentives, what ERM lesson can be derived
from Levitt’s story of the blood bank?
6. The 2008 global financial crisis has been compared to the great depression that started with the U.S. stock market crash in 1929. What was the ERM lesson that
governments knew in 2008 that was not known in the 1930s?
7. Why did the internal auditors, compliance officers, and quantitative tools fail to see the 2008 financial crisis in advance?
8. What did the 2008 financial crisis show us about the ERM framework developed by The Committee of Sponsoring Organizations (www.coso.org)?
Chapter 7. Visual Risk Clusters
1. Chapter 7 describes a hierarchy of risks and proposes addressing it using visual risk clusters. Is this an improvement over earlier techniques for understanding
risk relationships? Why or why not?
2. An insurance company would like to write earthquake coverage in California. It can only accept $100 million of exposure but can write policies that would have
potential losses of $500 million. How can insurance securitization allow it to accept the larger level of loss and pass it off to the capital markets? Be specific.
3. A city approved the construction of a $30 million waste recycling facility and floated a municipal bond to finance it. The city signed a guaranteed investment
contract with an investment bank. How can the GIC help meet the city’s needs with respect to financing the project? Be specific.
4. An investment bank created a collateralized debt obligation containing 10,000 residential mortgages. Investors purchased it. How would they earn a return on the
investment? What could go wrong? Be specific.
5. AIG stumbled in 2008. Tell the story of what happened. Include details.
Added BP Oil Spill Exercises (Material found after Part 3 exercises)
1. If you had been the CEO of BP Oil, what would you have done differently in advance of the oil spill?
2. If you took over as CEO at the start of the oil spill, what would you have done differently?
Part 3 Miscellaneous ERM Exercises
Chapter 8. Visual Risk — A Hypothetical Case
1. Central Power and Light implemented an ERM program to pursue sustainable competitive advantage. Did it address both the possibility of loss and the upside of risk?
Explain your reasoning.
Chapter 9. Tagging Risk – An Example
1. Public Power and Light illustrates the tagging of risks in a visual risk cluster system. What is the goal of tagging? Does it achieve the goal?
Chapter 10. Airbus A380 Jumbo Jet
1. What is the ERM lesson learned from the failure to include airport and airline negotiations in the A380 Power8 program?
Chapter 11. Product Launch Application
1. The launch of a new product is a key initiative that can be included in an ERM program. What are some other examples of business activities that can be evaluated
using visual risk clusters?
Added Anonymous Exercise (Material found after BP Oil Spill material)
1. Describe a recent activity of Anonymous. Is it growing stronger or weaker? Explain your reasoning.
