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On the Strategic Value of Risk Management

Author

Listed:
  • Thomas‐Olivier Léautier

    (University of Toulouse 1 - Toulouse School of Economics (TSE))

  • Jean-Charles Rochet

    (GFRI, University of Geneva; Swiss Finance Institute; University of Zurich - Swiss Banking Institute (ISB))

Abstract

This article examines how fi rms facing volatile input prices and holding some degree of market power in their product market link their risk management with their production or pricing strategies. This issue is relevant in many industries ranging from manufacturing to energy retailing, where risk averse fi rms decide on their hedging strategies before their product market strategies. We fi nd that hedging modi es the pricing and production strategies of firms. This strategic effect is channelled through the risk-adjusted expected cost, i.e., the expected marginal cost under the measure induced by shareholdersrisk aversion. It has diametrically opposed impacts depending on the nature of product market competition: hedging toughens quantity competition while it softens price competition. Finally, committing to a hedging strategy is always a best response to non committing, and is a dominant strategy if fi rms compete à la Hotelling.

Suggested Citation

  • Thomas‐Olivier Léautier & Jean-Charles Rochet, 2013. "On the Strategic Value of Risk Management," Swiss Finance Institute Research Paper Series 13-20, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1320
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    Cited by:

    1. is not listed on IDEAS
    2. Georges Dionne & Marc Santugini, 2015. "Production Flexibility and Hedging," Risks, MDPI, vol. 3(4), pages 1-10, December.
    3. Hamed Ghoddusi & Franz Wirl, 2019. "A Risk-Hedging View to Refinery Capacity Investment," Working Papers 1327, Economic Research Forum, revised 21 Aug 2019.
    4. Dionne, Georges & Santugini, Marc, 2014. "Entry, imperfect competition, and futures market for the input," International Journal of Industrial Organization, Elsevier, vol. 35(C), pages 70-83.
    5. Caleb Cox & Arzé Karam & Matthias Pelster, 2022. "Two-Period Duopolies with Forward Markets," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 60(1), pages 29-62, February.

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    Keywords

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    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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