Managing Financial Risk and Its Interaction with Enterprise Risk Management E-Book

Daniel A. Rogers

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Global Finance Executive Select
• Sprache: Englisch

Seitenzahl: 35

Veröffentlichungsjahr: 2010

Beschreibung

This chapter first discusses financial risk management from a broad perspective, including possible definitions and examples of industry applications of financial hedging. The discussion then moves to a basic review of the theoretical rationales for managing (financial) risk and the related empirical findings. The potential for the interaction of financial hedging with other areas of risk management (such as operational and strategic) is then explored. Finally, there is a discussion regarding the lessons that can be applied to Enterprise Risk Management from the knowledge base about financial hedging.

Leseprobe

Contents

Cover

Title Page

Copyright

CHAPTER 18: Managing Financial Risk and Its Interaction with Enterprise Risk Management

INTRODUCTION

WHAT IS FINANCIAL RISK AND HOW IS IT MANAGED?

THEORETICAL UNDERPINNINGS OF FINANCIAL HEDGING AND EMPIRICAL FINDINGS

INTERACTION OF FINANCIAL HEDGING WITH OTHER TYPES OF RISK MANAGEMENT

WHAT CAN WE LEARN ABOUT ERM GIVEN OUR KNOWLEDGE OF FINANCIAL HEDGING?

NOTES

REFERENCES

ABOUT THE AUTHOR

Copyright © 2009 by John Wiley & Sons, Inc. All rights reserved.

Disclaimer: This content is excerpted from Enterprise Risk Management: Today’s Leading Research and Best Practices for Tomorrow’s Executives, by John Fraser and Betty J. Simkins (978-0-470-49908-5, 2009), with permission from the publisher John Wiley & Sons. You may not make any other use, or authorize others to make any other use of this excerpt, in any print or non-print format, including electronic or multimedia.

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This chapter first discusses financial risk management from a broad perspective, including possible definitions and examples of industry applications of financial hedging. The discussion then moves to a basic review of the theoretical rationales for managing (financial) risk and the related empirical findings. The potential for the interaction of financial hedging with other areas of risk management (such as operational and strategic) is then explored. Finally, there is a discussion regarding the lessons that can be applied to Enterprise Risk Management from the knowledge base about financial hedging.

Derived from Fraser, John and Betty J. Simkins. Enterprise Risk Management: Today’s Leading Research and Best Practices for Tomorrow’s Executives. Hoboken, NJ: John Wiley & Sons, Inc., 2009. 978-0-470-49908-5.

978-1-118-00648-1 978-0-470-95236-8

CHAPTER 18

Managing Financial Risk and Its Interaction with Enterprise Risk Management

DANIEL A. ROGERS

School of Business Administration, Portland State University

INTRODUCTION

Financial risk management encompasses corporate strategies of employing financial transactions to eliminate or reduce measurable risks. Most businesses face financial risks of some sort, such as currency price volatility, interest rate changes, commodity price fluctuations, or from some other source.

A key attribute of a financial risk is that it can be managed by entering into some form of contract that can be settled in cash. Classic forms of contracts with these characteristics include forward contracts privately arranged between two parties or futures contracts traded on exchanges located around the world. Exhibit 18.1 includes an overview of some of the types of contracts traded at several of the largest futures exchanges in the United States. As may be seen from the wide array of contract types and underlying assets, futures markets exist to manage risks as disparate as those arising from the stock market (i.e., S&P 500) to the amount of snowfall in Boston or New York City.

Financial risk management strategies, often called financial “hedging,” can be considered as a predecessor in the evolution of enterprise risk management (ERM) programs. ERM addresses a far broader array of risks than those that can easily be hedged using financial contracts. However, hedging of financial risk by firms around the world has been sufficiently commonplace that this behavior has been well studied, especially over the last 15 years. Given the considerable amount of research that has been completed on the benefits of financial hedging, the findings are relevant to firms considering the implementation of broader risk management strategies such as ERM.