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Corporate Decision-Making with Macroeconomic UncertaintyPerformance and Risk Management$
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Lars Oxelheim and Clas Wihlborg

Print publication date: 2008

Print ISBN-13: 9780195335743

Published to Oxford Scholarship Online: May 2009

DOI: 10.1093/acprof:oso/9780195335743.001.0001

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Strategies for Risk and Exposure Management

Strategies for Risk and Exposure Management

Chapter:
(p.155) Chapter 8 Strategies for Risk and Exposure Management
Source:
Corporate Decision-Making with Macroeconomic Uncertainty
Author(s):

Lars Oxelheim (Contributor Webpage)

Clas Wihlborg

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780195335743.003.0008

Given the firm's objective with respect to shareholders and other stakeholders, it is naturally desirable that a risk management strategy is consistent with the objective. A firm's objective has several dimensions. It can be defined in terms of a target variable such as profit, economic value, shareholders' wealth, or book value. In addition, the time horizon must be made explicit. Risk attitude with respect to the target variable is a third dimension. Determination of a risk management strategy requires also that management takes a position with respect to financial market efficiency, the existence of risk premiums, purchasing power parity, and costs of adjusting operations. These costs determine the role of financial risk management relative to the adjustment of operations and pricing. Flexibility of operations is a real option. Four types of strategies for financial risk management are discussed in this chapter based on the management's risk attitude and perception of profit opportunities in financial markets; laissez-faire (do nothing), aggressive, minimize variance, and selective hedging. These strategies can be chosen for any target variable and time horizon. Choosing a strategy is, to a large extent, an information problem. Information requirements for selective hedging, in particular, can become so overwhelming that the range of feasible strategies does not encompass it. In this situation management is faced with the need to determine what risk management objectives can be achieved with the available information.

Keywords:   risk management strategy, financial risk management, information requirements, target variable, risk attitude, laissez-faire, aggressive, minimize variance, selective hedging, expectations hypothesis

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