CONSIDERATIONS REGARDING FINANCIAL RISK MANAGEMENT IN ORDER TO MAXIMIZE EARNINGS DURING THE CORONAVIRUS PANDEMIC - Sciendo
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Scientific Bulletin
Vol. XXV, No 1(49), 2020
CONSIDERATIONS REGARDING
FINANCIAL RISK MANAGEMENT
IN ORDER TO MAXIMIZE EARNINGS DURING
THE CORONAVIRUS PANDEMIC
Florin ILIE
ilieflorinv@yahoo.com
“NICOLAE BĂLCESCU” LAND FORCES ACADEMY, SIBIU, ROMANIA
ABSTRACT
This paper addresses a very topical issue, given by the world of
financial investments and especially by the period of great uncertainty
that we are going through. It is rightly said that it is the simplest and
most enjoyable thing to be an investor when the market
grow/hikes/rises. Differences between investors occur when feelings of
fear and panic become widespread and flood the stock markets.
Are we now in a period of sharp declines in the world's financial
markets or is it just a correction? Experimenting with new asset
classes, identifying the huge opportunities that the market has to offer,
the correct management of risks and possible earnings are some of
the most important aspects in the context of getting the highest
possible earnings. This paper focuses on risk management in order to
maximize earnings during a large-scale crisis, such as the current
global situation generated by coronavirus or how you can add value
to the investor spirit in your portfolio.
KEYWORDS:
Risk management, crisis, earnings, portfolio
1. Introduction world, can affect investors’ portfolios,
“The first rule is never lose money” leading to major losses. Unfortunately, if
are Warren Buffett’s words deeply rooted in this happens, it is very difficult to start
the doctrine of every investor (Kirby, 2017). while having to recover these losses.
The current situation, which comes after an Here comes the notion of risk and
accelerated decline in share prices relative especially that of risk management. In the
to the values at the beginning of the year, is current situation, money management by
presented as a great opportunity to make ear or after “100 % safe” tips from a
money. Also, the situation of the capital “benevolent” friend, based only on flair and
markets, generated by the uncertainty the inspiration of the moment is no longer
looming over the management of the effects enough. It is becoming increasingly clear
of the coronavirus pandemic, reflected in that you cannot win the battle without a
the decisions of the governments around the clear strategy, defined on the right
DOI: 10.2478/bsaft-2020-0004
© 2017. This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivs 3.0 License.
26principles, which, in addition to those listed investors see the risk as something
above, also includes scientific elements, negative, with destructive effects, but it
based in particular on understanding and must be understood that in the area of
managing the risks that may arise and on investment the accepted risk and it being
taking them into account in the investment managed correctly can be a huge
context. opportunity and may bring significant gains
There are investors who aggressively (Ciocoiu, 2008).
buy, who consider that the current declines The risk manager is the investor
are a great opportunity, which they are not himself, and the risk management activity is
allowed to miss. They only think of the crucial for the success of the investments,
market interventions that characterized the especially the use of information (Aebi,
previous crisis (monetary policy interest Sabato & Schmid, 2012). Nowadays it is
rate cuts, money thrown at the market by very easy to obtain information, to look for
central banks) and strongly believe in the data and values about any company from
effectiveness of these methods. On the other the comfort of your own home, but it is up
hand, there are those who sell aggressively, to each individual investor or risk manager
those who are scared by the magnitude of as we called him before, to analyze and
the declines of 11 years ago and the especially to put into practice this information
possibility of massive losses in their in order to obtain a substantial gain.
portfolios. There is also a category of The approach to risk is also greatly
investors who choose to do nothing. influenced by the personal characteristics of
They are also thinking about the crisis of risk managers. We can talk here about the
2009 and expect much greater opportunities, risk profile of investors, how they can
wider declines, which should be reflected in manage their fear of losing money or the
the share price. They are waiting for a greed to earn more when markets are at
better time to take advantage of market their peak or at their minimum. That is why
imperfections in order to optimize earnings. every investor should know very well his
Regardless of which category they risk profile and especially his risk aversion,
belong to, this is the time when investors in order to know in which type of
redo their calculations, review their investment (suits him the best) he feels
strategies, analyze possible vulnerabilities most comfortable (Dima, 2012).
and threats in the market, but also their
impact on their own portfolio. This is the 3. Where are we now?
financial risk management and the correct Coronavirus overtaking China’s
application depends on the result of the borders and appearing in Europe and
investment: earning or loss. spreading to all continents, somehow timid
at first but then becoming increasingly
2. Concepts related to financial risk aggressive, has marked some generalized
management declines in the world's stock markets.
“The biggest risk is when there is no The fact that the stock market reacts to
risk” (Opran, Stan, Abaza & Nastasa, 2002). rumors became true in this case as well.
When we accept the existence of a risk, we Fears of the coronavirus pandemic and of
can use the concept of risk management and the emergence of a recession or even of an
it can be controlled and even exploited. If economic downturn began after February
we cannot find any risk in the investment 19, 2020 and led to aggressive sales and
strategy, then we will certainly discover massive declines in world markets. We are
along the way hidden risks to which we are talking about a period of almost a month
vulnerable and which can partially or even and decreases of tens of percent, as can be
totally affect our earnings. Most of the seen in Table no. 1, many investors reacting
27emotionally, panicking and selling a large Obviously, it can prove itself bad if we are
part of their holdings. just talking about a simple correction.
Such a reaction is common among the The effects of a “black swan” type
investors, in which they sell and then ask event, such as the current COVID 19
themselves questions, especially in the pandemic, could not have been known in
context in which no one has forgotten the advance so you cannot know the direction
wave of declines generated by the economic that the markets will follow in such a case.
crisis of 2008. Is this a proof of the fragility What every investor should consider is an
of the investment plans and assumed active financial risk management, a
strategies, the lack of an active risk rigorous analysis of the impact of the
management plan? Sometimes, this reaction effects of the crisis on the investment
can be beneficial for their portfolios, to portfolio and the establishment of clear
secure their cash for subsequent purchases. directions of action in order to avoid losses.
Table no. 1
Decreased indices in several stock markets in the world
(Source: https://finance.yahoo.com)
Value at Value at
Index Country Curency Variation
19.02.2020 23.03.2020
S&P 500 USA USD 3,386.15 2,237.40 -33.92%
DJI USA USD 29,348.03 18,591.93 -36.65%
NIKKEI 225 JPN JPY 23,400.70 16,552.83 -29.26%
DAX 30 GER EUR 13,789.00 8,741.15 -36.61%
FTSE 100 GBR GBP 7,457.02 4,993.89 -33.03%
CAC 40 FRA EUR 6,111.24 3,914.31 -35.95%
ATX AUT EUR 3,198.33 1,880.82 -41.19%
BET ROM LEI 10,204.97 7,038.95 -31.02%
Severe measures have been taken to In March, the first predictions related
stop the virusfrom spreading, measures to the size of the disaster caused by the
which lead to the partial or even total coronavirus pandemic appeared, culminating
blockade of many economical sectors. with the April 14 estimates of the
Active workplaces entered an area of International Monetary Fund, which
accelerated declines and the world, as we predicted the possibility of a contraction of
used to know it, have started a the world’s economy by over 3 % this year.
comprehensive process of transformation. During this time, the shares registered a
Certain areas, which a few months before strong return, as it can be seen in table
seemed to aim their maximums, entered a no. 2. Including in Romania, while we were
steep downward slope, without a horizon of talking more and more often about a
stopping or at least slowing down the decrease of 4-6 % this year and an
decrease. The tourism industry, the unemployment rate over 10 %, the shares
restaurants industry, the air transport or registered a sharp recovery.
cruises indusrty were the most affected
ones, with decreases of up to 80 %.
28Table no. 2
The return of the indices value in world stock markets
(Source: https://finance.yahoo.com)
Value at Current value
Index Country Curency Variation
23.03.2020 22.05.2020
S&P 500 USA USD 2,237.40 2,955.45 32.09%
DJI USA USD 18,591.93 24,465.16 31.59%
NIKKEI 225 JPN JPY 16,552.83 20,388.16 23.17%
DAX 30 GER EUR 8,741.15 11,073.87 26.69%
FTSE 100 GBR GBP 4,993.89 5,993.28 20.01%
CAC 40 FRA EUR 3,914.31 4,444.56 13.55%
ATX AUT EUR 1,880.82 2,127.47 13.11%
BET ROM LEI 7,038.95 8,592.48 22.07%
4. Risk management in the area of market and I focused on the shares that
financial investments have fallen sharply during this period:
We discussed in the first part of the airline companies. From this asset class,
paper about different behavioral patterns of I chose to analyze the risks for Delta Air
investors. We will see over a horizon of Lines, Inc. (DAL is the stock symbol),
6 months or a year which of them was the founded in 1925 and listed on the American
winner, but until then, how many and New York Stock Exchange (NYSE).
especially how big can be the risks that we One of the most important airline
are willing to take. In the literature dealing companies, Delta Air Lines was at the
with financial investments, there is a lot of beginning of 2020 a “must have” in the
talk about the inversely proportional influence portfolio of any investor. Even Warren
of the risk-return binomial: the higher the Buffett, chairman of the Berkshire Hathaway
risk, the greater the chances of gain. investment fund, spoke superlatively at the
The timing of the investment is end of last year about aviation-related
perhaps one of the most important aspects stocks. Moreover, Buffett expressed interest
we need to take into consideration. Entering in owning an airline in his portfolio, as
the purchase with a large part of the portfolio evidenced by his fund’s holdings of about
can bring a substantial profit, if the timing 10 % in the four major US airline
is very well chosen, but unfortunately no sompanies: Delta, Southwest Airlines
one has the power of knowing when that (LUV), American Airlines Group (AAL)
moment is. Maybe some people manage to and United Airlines Holdings (UAL).
make good or very good purchases He has spoken favorably in recent years
2-3 times, but there is a huge risk that the about the beneficial changes brought to the
time to enter the market is not the right one. industry from the perspective of investors,
Whether you buy on an upward or downward including the consolidation and discipline
curve, there is a risk that that increase will of improving the pricing policy and
be only temporary or that the decline will automatically an increase in the companies'
continue and that red will be the predominant profits.
color in the investment portfolio. What happened to the price of DAL
I propose to analyze some high-risk shares in 2020 can be seen in Figure no. 1:
investment options in the United States
29Delta Air Lines, Inc. (DAL)
Figure no. 1: Graph of the evolution of DAL shares between 01.01-22.05.2020
(Source: Delta Air Lines, Inc. (DAL), 2020)
The beginning of 2020 brought a From a 25 % decrease, any time could
lateral evolution for DAL shares, but the have been considered as a good time to start
unfortunate events that triggered panic on buying. When and with what amount? It is
world stock markets since February 24 did very difficult to say now what an investor
not bypass the airline company (a few days should have done in those moments when
after the company rewarded its shareholders the share price was constantly falling, when
with a dividend of 0.403 USD / share). no matter what you bought one day, the
The shares price fell from $ 58.99, which next day you were at a loss.
was the maximum on February 20, to a The emotional risk was the biggest
minimum of $ 19.10 on March 19, a 67.62 % enemy of investors, and managing it was
drop in less than a month. At the same time, almost impossible. I gave the best example
the S&P 500 index fell by “only” 33.92 %, before, with one of the largest investment
less than half of the loss recorded by DAL funds in the world, with the best analysts of
shares. the financial markets and who bought
Practically, during this period, all the shares at a very good time in their opinion,
planes were recorded on the ground, many but which turned out to be very stupid after
flights being suspended due to the losing more than 50 % of the purchase
restrictions generated by the coronavirus. value.
The only transports were cargo flights, with This was followed by a spectacular
planes like Boeing 777-200LRs and Airbus return of almost 88 %, to a maximum of
A350s. It was such a sharp drop that no one 35.89 USD/share, reached on March 26,
was expecting, due to the sharp decline in which means that the share almost doubled
demand and especially to the company’s in value in only 6 trading sessions.
liquidity. As a complement to what we The increase in the share price was a
presented earlier, during this period, more mouthful of oxygen for the company and
precisely around 48 USD per share, Berkshire for the shareholders as well, thanks
Hathaway increased its participation in the primarily to the government aid requested
transport company by another 1 million shares, by the airlines, which were severely
reaching a holding of approximately 11 %. affected by the coronavirus crisis.
30Shares return to decline, while S&P measures to relax. Many activities resume,
downgraded Delta Air Lines rating to “BB” shyly, but they resume their work cycle.
from “BBB-” and the company said it Some experts estimate that air transport will
expects the revenue from second quarter to soon reopen, but with increased protection
fall by $ 10 billion, or by 80 percent measures at airports, with the mandatory
compared to the similar period in 2019. wearing of masks, with the maintenance of
Contrary to what is happening on the a buffer zone between passengers
American market and on most stock (for example in a group of 3 seats, the
markets in the entire world, DAL shares middle seat will be vacated). The company
continued to fall to a minimum of $ 17.51, will not return to the parameters of the
recorded on May 14. At that price, the beginning of the year too soon, but it will
decrease exceeded 80 % of the value certainly convey a sense of optimism to the
recorded on 20 February. This happened investors.
after the United States Government Is this a good time to buy?
announced in late April that it had reached a
rescue agreement with major US airlines, 5. Conclusions
one of the most affected sectors by the We will find the answer to these
COVID-19. It is estimated that this package questions in the near future. What to do
amounts to 25,000 million dollars (more now? Obviously, every investor does his
than 22,700 million euros) and aims to homework, and by that I mean that he does
enable companies to pay their employees’ his own risk management, because in the
salaries, given that they must maintain investments world, the risk profile has an
90 % of the workforce they had on March 24. extremely important role. The same market
Although he said he would not sell news is perceived differently by two
the stake in Delta Air Lines, Warren Buffett investors, because each one of them has a
and Berkshire Hathaway liquidated their different risk aversion. Probably those with
stock of shares of all four major airlines in a low risk appetite will remain in the area of
their portfolio, marking a loss of tens of government securities or debt securities or
percent. The loss is estimated to exceed less risky stocks (like Amazon, Microsoft,
$ 5 billion. Google, etc.) and under no circumstances
We are now at a price of 22.69 USD they will buy DAL shares, even if the
per share, with a discount of 61.54 % discount is extremely generous, over 60 %
compared to the February price. Risk at the moment, as I said before.
managers from the large investment funds For investors with a more aggressive
say that the company is more vulnerable risk profile, I consider it as an investment
than ever. More vulnerable than in opportunity. Due to the fact that the risk
September 2011 or during the crisis of associated with a loss is very high, this risk
2009. The threat posed by the risk of must be managed with great care. The risk
default is very high and the impact can be profile of the investor is taking its toll here
devastating. Yes, experts consider that there as well, but there are solutions.
is place for a decline. President Ed Bastian For speculators, any decline can attract
told his employees through a memorandum intraday buying and selling with some nice
in early April that the airline was spending earnings, due to the very high volatility of
more than $ 60 million a day and canceled these shares. For medium and long-term
about 80 percent of flights scheduled for investors, DAL shares represent a great
April. opportunity, but the question remains: when
Is this a good time to sell? is the best time to buy? One of the answers
At the same time, governments to this question is given by the DCA
around the world announced the start of (Dollar Cost Averaging) method.
31Any investor would like to find a magic This method is used to reduce the risk of
formula that allows him to find the right losing money on more volatile investments
time to buy and sell, but unfortunately there is or in turbulent times for those companies,
no such a thing, because past results are under as is the case here.
no circumstances a guarantee for future.
REFERENCES
Aebi, V., Sabato, G., & Schmid, M. (2012). Risk management, corporate governance,
and bank performance in the financial crisis. Journal of Banking & Finance, Elsevier,
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Ciocoiu, C. N. (2008). Managementul riscului: Vol. 1: Teorii, practici, metodologii.
Bucureşti: Editura Academiei de Studii Economice.
Delta Air Lines, Inc. (DAL). (2020), available at: https://finance.yahoo.com/
quote/DAL?p=DAL, accessed on 23 May 2020.
Dima, I.C. (2012). Theoretical approach of managerial risk. Internal Auditing & Risk
Management.
https://finance.yahoo.com, accessed on 23 May 2020.
Kirby, J. (2017). Warren Buffett returns with new lessons for investors. The Austalian
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