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A Framework for Risk Management

hbr.org

Many companies use the insights of financial managers and external consultants to manage their risk. A one-size-fits-all solution is not yet in existence when it comes to risk management.

These companies usually use derivatives like forwards, options, swaps and futures

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Top-level managers and financial engineers must work in tandem to develop and execute a strong risk-management strategy. The three basic premises for this corporate strategy are:

  1. Creating corporate value by making good investments.
  2. Generating cash internally to fund the inve...

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Future markets are nothing new, and before the stock market, they existed in many places in the form of crop trade, back in the middle ages.

Farmers would hedge their risks by selling their crops to consumers at preset prices on a predetermined future date. This provided assurance to a ris...

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Corporations managing risk themselves face a fundamental question: why do they need to do it? Individuals and investment groups can manage the risk on their own. Making good investments seems like a better option.

Hedging bets are mostly fictional transactions that don’t affect the value o...

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Risk management through hedging allows companies to borrow from themselves, transferring funds to where they are needed the most.

  • The main objective of risk management is that the company should have cash available for making value-enhancing investments.
  • Compan...

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Top leaders and managers can benefit from these broad guidelines on risk-management issues:

  1. Companies in the same sector need not necessarily have the same hedging strategies.
  2. Companies can benefit from risk management strategies even if they don’t have any major investments...

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