does risk management add value

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1、CHAPTER34DOESRISKMANAGEMENTADDVALUE?∗CharlesW.SmithsonPressreportsondisastrousoutcomesfromderivativesusehavecreatedanxietyaboutrisk-managementproducts.Riskmanagementviaderivativescanincreasethevalueofacompany,however,byreducingtaxes,reducingtransactio

2、ncosts,andfacilitatingvalue-maximizinginvestments.Moreover,preliminaryempiricalevidencesuggeststhatthemarketreactspositivelywhencompaniesusederivativestoreducetheirexposuretofinancialpricerisk.Theyear1994wasawatershedinriskmanagement.Priorto1994,manyco

3、rporatetreasurersandchieffinancialofficershesitatedtouserisk-managementproductsbecausetheyfearedthatthisapproachwastoosubtleandcomplexfortheirshareholderstounderstand.Afterthefirstquarterof1994,someCFOsandtreasurersstillhesitatedtouseriskmanagement,nowbe

4、causetheyfearedthatifthemarketfoundouttheywereusingderivatives,theircompanieswouldbepenalized;theirsharepriceswouldfall.Thispresentationdiscusseswhyandhownonfinancialcompaniesapplyriskmanage-mentandpreviewssomenewempiricalevidenceonhowthemarketreactsto

5、acompany’suseofriskmanagement.1COMPANYUSESOFRISKMANAGEMENTCompaniesuserisk-managementproductsforavarietyofreasons:toreducetheirfundingcosts,toincreasetheirdebtcapacity,andtoincreasenetcashflowsbyreducingcostsassoci-atedwithfinancialdistressandbondholder

6、-shareholderconflict.∗ReprintedfromAIMRConferenceProceedings:CorporateFinancialDecisionMakingandEquityAnalysis(July1995):47–53.501CH034.indd5018/28/108:41:53PM502PartIII:ManagingRisk—DerivativesReductionofFundingCostsCompaniesuseriskmanagementtoreducet

7、heirfundingcostsinatleastthreeways:byact-ingonaview,by“arbitraging”themarkets,andbyreducingtransactioncosts.Thissectiondescribesthesemethodsandprovidessomeillustrations.ActingonaViewThisapproachtoreducingfundingcoststhroughriskmanagementisthemosttroub

8、lesomeofthethreeandtheonethathascapturedattentioninthepress.Asthefollowingexampleillustrates,astrategyusedbymanycompaniesintheearly1990swasbasedontheirviewthatactualspotrateswouldbedifferentfromthoseforecastedbyforwardrates.InJuly1992,interest