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2 - Economic exposures in corporate risk management

Published online by Cambridge University Press:  05 June 2012

Torben Juul Andersen  and
Peter Winther Schrøder
Torben Juul Andersen
Affiliation:
Copenhagen Business School
Peter Winther Schrøder
Affiliation:
Copenhagen Business School
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Summary

To begin the risk management discourse, this chapter outlines more conventional approaches to risk management. The starting point is common financial and market-related risks reflected in currency and interest rate exposures. The chapter provides an outline of common analytical approaches to monitor excess exposures. General measures of price sensitivities are presented and extended to assess the sensitivity of corporate equity positions to changing business conditions. The treatment of more complex market-related exposures in value-at-risk calculations is outlined and illustrated in multiple examples. The consequences of fat-tailed distributions that reflect a potential for rare but extreme events are discussed, as is the need for stress testing in corporate risk assessments.

Exposures to market risk

The overarching risk considerations in international business and multinational financial management has been the potential influence of changes in foreign exchange rates on future corporate cash flows and the related effects on long-term competitiveness. In addition to this, there have been frequent discussions of political, sovereign and country risks associated with international funds transfer and cross-border investments. Many historical events illustrate the potential effects of fluctuations in foreign exchange rates and volatile financial market prices in general. Some of these notable events include dramatic stories like those of Herstatt Bank, Franklin National and Metallgesellschaft (see Box 2.1 Bankhaus Herstatt – foreign exchange settlements, Box 2.2 Franklin National – currency speculation and Box 2.3 Metallgesellschaft – position on petroleum prices).

Type
Chapter
Information
Strategic Risk Management Practice
How to Deal Effectively with Major Corporate Exposures
 , pp. 33 - 52
Publisher: Cambridge University Press
Print publication year: 2010

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References

Andersen, T. J., 1993. Currency and Interest Rate Hedging (2nd edn). Prentice Hall: Upper Saddle River, New Jersey.Google Scholar
Baum, J. A. C. and McKelvey, B., 2006. ‘Analysis of Extremes in Management Studies’. Research Methodology in Strategy and Management 3, pp. 123–96CrossRefGoogle Scholar
Bender, R. and Ward, K., 2002. Corporate Financial Strategy. Butterworth-Heinemann: Boston, Massachusetts.Google Scholar
Click, R. W. and Coval, J. D., 2002. The Theory and Practice of International Financial Management. Prentice Hall: Upper Saddle River, New Jersey.Google Scholar
Crouchy, M., Galai, D. and Mark, R., 2006. The Essentials of Risk Management. McGraw-Hill: New York.Google Scholar
Eitemann, D. K., Stonehill, A. I. and Moffet, M. H., 2004. Multinational Business Finance (10th edn). Pearson Education: Boston, Massachusetts.Google Scholar
MacKenzie, D., 2003. ‘Long-Term Capital Management and the Sociology of Arbitrage’. Economy and Society 32(3), pp. 349–80.CrossRefGoogle Scholar
Oxelheim, L. and Wihlborg, C., 2003. Managing in the Turbulent World Economy: Corporate Performance and Risk Exposure. John Wiley & Sons: Chichester, West Sussex.Google Scholar
Santomero, A. M. and Babbel, D. F., 2001. Financial Markets, Instruments, and Institutions (2nd edn). McGraw-Hill Irwin: Boston, Massachusetts.Google Scholar
Shapiro, A. C., 2003. Multinational Financial Management (7th edn). John Wiley & Sons: New York.Google Scholar
Bender, R. and Ward, K. (2002). Corporate Financial Strategy. Butterworth-Heinemann: Boston, Massachusetts, p. 314Google Scholar
Crouchy, M., Galai, D. and Mark, R. (2006). The Essentials of Risk Management. McGraw-Hill: New York, p. 28Google Scholar
Eitemann, D. K., Stonehill, A. I. and Moffet, M. H. (2004). Multinational Business Finance (10th edn). Pearson Education: Boston, MassachusettsGoogle Scholar
Shapiro, A. C. (2003). Multinational Financial Management (7th edn). John Wiley & Sons: New YorkGoogle Scholar
Click, R. W. and Coval, J. D. (2002). The Theory and Practice of International Financial Management. Prentice Hall: Upper Saddle River, New JerseyGoogle Scholar
Santomero, A. M. and Babbel, D. F. (2001). Financial Markets, Instruments, and Institutions (2nd edn). McGraw-Hill Irwin: Boston, MassachusettsGoogle Scholar
Oxelheim, L. and Wihlborg, C. (2003). Managing in the Turbulent World Economy: Corporate Performance and Risk Exposure. John Wiley & Sons: Chichester, West SussexGoogle Scholar
Baum, J. A. C. and McKelvey, B. (2006). ‘Analysis of Extremes in Management Studies’. Research Methodology in Strategy and Management 3, pp. 123–96CrossRefGoogle Scholar
MacKenzie, D. (2003). ‘Long-Term Capital Management and the Sociology of Arbitrage’. Economy and Society 32(3), pp. 349–80CrossRefGoogle Scholar

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