Implementing an Integrated Risk Management Program. Why does a Firm Need an Integrated Risk Management Program?.
Implementing an Integrated Risk Management Program
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Why does a Firm Need an Integrated Risk Management Program?
To Avoid Derivatives Debacles – Large derivatives-related losses have been making headlines since the early 1990s (e.g., Codelco, Gibson Greetings, P&G, Mead, etc.). Usually due to poor controls, weak oversight, and/or ignorance.
To Remain Competitive / Gain Advantage – Hedging programs can be initiated to provide strategic advantages in terms of pricing products, protecting operating margins, creating new products/services, and improving customer relations.
Derivatives vs. Natural Hedges / Liquidity Management – e.g., can locate assets and liabilities in same country or hold excess liquidity to hedge rather than use derivatives (but can be costly in terms of flexibility and profitability).
Passive vs. Active Management – if markets are efficient, there no real gains to active management.
Define Ground Rules – must define what instruments, purposes, and amounts can be hedged (and by whom).
Counter-party Risk – derivatives are credit instruments and therefore the firm must manage this inherent risk.