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The rise of risk management

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  • J. David Cummins
  • Richard D. Phillips
  • Stephen D. Smith

Abstract

Risk management is nothing new, despite the increased attention given to the subject over the past decade or two. For well over one hundred years farmers have engaged in risk management, hedging their risks against price fluctuations in commodity markets. Unlike a family farmer, however, a corporation is owned by shareholders, who can, if they so wish, greatly reduce or eliminate the risk of low prices simply by holding a diversified portfolio. ; Why, then, are managers doing for shareholders what shareholders apparently can do for themselves? This article provides a review of the rationales concerning why corporations might engage in risk-management practices. The authors also cite some empirical evidence consistent with the idea that managers use derivative securities, a particular form of risk management, to reduce the volatility of their own income stream. However, a growing body of literature suggests that at least a portion of total derivatives contracting is related to activities known to increase firms' value - for example, avoiding costly external finance and lowering expected tax bills.

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Bibliographic Info

Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

Volume (Year): (1998)
Issue (Month): Q 1 ()
Pages: 30-40

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Handle: RePEc:fip:fedaer:y:1998:i:q1:p:30-40:n:v.83no.1

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Keywords: Derivative securities ; Risk;

References

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  1. Geczy, Christopher & Minton, Bernadette A & Schrand, Catherine, 1997. " Why Firms Use Currency Derivatives," Journal of Finance, American Finance Association, vol. 52(4), pages 1323-54, September.
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Cited by:
  1. Beverly J. Hirtle & Kevin J. Stiroh, 2005. "The return to retail and the performance of U.S. banks," Staff Reports 233, Federal Reserve Bank of New York.
  2. Kevin Stiroh, 2006. "New Evidence on the Determinants of Bank Risk," Journal of Financial Services Research, Springer, vol. 30(3), pages 237-263, December.
  3. Marshall, Andrew P., 2000. "Foreign exchange risk management in UK, USA and Asia Pacific multinational companies," Journal of Multinational Financial Management, Elsevier, vol. 10(2), pages 185-211, June.
  4. Siti Zaleha Abdul Rasid & Abdul Rahim Abdul Rahman & Wan Khairuzzaman Wan Ismail, 2011. "Management accounting and risk management in Malaysian financial institutions: An exploratory study," Managerial Auditing Journal, Emerald Group Publishing, vol. 26(7), pages 566-585, July.
  5. Kevin Stiroh, 2004. "Do Community Banks Benefit from Diversification?," Journal of Financial Services Research, Springer, vol. 25(2), pages 135-160, April.
  6. Iman van Lelyveld & Arnold Schilder, 2002. "Risk in Financial Conglomerates: Management and Supervision," Research Series Supervision (discontinued) 49, Netherlands Central Bank, Directorate Supervision.
  7. Stiroh, Kevin J. & Rumble, Adrienne, 2006. "The dark side of diversification: The case of US financial holding companies," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2131-2161, August.
  8. Jian Yang & David J. Leatham & Spencer A. Case, 2000. "The wealth effect of swap usage in the food processing industry," Agribusiness, John Wiley & Sons, Ltd., vol. 16(3), pages 367-379.

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