Principles of Finance · free preview
The Importance of Risk Management
Corporate risk management identifies the price and rate exposures that threaten the firm's cash flows and manages them through hedging, accepting the premise that stabilizing inputs lets the firm focus on its real business.
1. The goal of corporate risk management
The goal of corporate risk management
2. Hedging versus speculation
Hedging versus speculation
3. The exposure families
The exposure families
4. The governance of hedging
The governance of hedging
5. The goal defined
What is the goal of corporate risk management?
6. Why incidental exposures deserve hedging
Why should a firm hedge commodity or currency exposures it is not paid to bear?
7. The bright line
What distinguishes hedging from speculation in corporate risk management?
8. The no-edge argument
Why do corporations generally have no business speculating on commodity or currency markets?
9. The exposure families
Which three families of market exposure does the module manage?
10. The governance wrapper
What governance structure should surround a corporate hedging program?
11. The variance reduction's name
What one-word term names the practice of taking offsetting positions to reduce exposure variance? Answer in lowercase.
12. The offset gap's name
What one-word term names the residual mismatch between an exposure's price and the hedge instrument's price? Answer in lowercase.
13. The directional bet's name
What one-word term names taking a market position without an offsetting exposure? Answer in lowercase.
14. The combined position's test
What statistical property must a true hedge reduce in the combined position, variance or mean? Answer with one word.
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