C.11.Stulz

  1. Companies behavior regarding risk mgt
    • large firms use more derivatives, even though small cpies have greater need for risk mgt
    • many cpies allow their view to influence hedging ratio
  2. Examples of poor financial risk mgt
    • Metallgesellschaft: believed could benefit from insight on mkt
    • Daimler-Benz: no hedge on currency risk on $ receivable because tought $ would stay high -> fall by 14%
  3. Impact of CF variability
    • higher expected bankruptcy cost: lawyer, court, raising funds
    • higher exp pmt to stakeholder: compensate for risk
    • higher exp tx: over time volatile income imply more tx (due to convexity of tx system)
  4. Capital structure vs risk taking initiatives
    • main purpose of managing risk = minimize prob of distress
    • cpies w low or no debt should not benefit from hedging
    • risk mgt = direct substitute for equity
    • cpies should only practice risk mgt if equity C > debt
    • if already in distress -> incr risk to incr prob of upper tail
  5. VaR vs Long-term
    • insufficient data (99% for 1 yr requires 100 yrs of data)
    • relies on normal dist, but tail events usually > normal dist => even more important on longer periods
Author
Exam9_2012
ID
138516
Card Set
C.11.Stulz
Description
Rethinking Risk Management
Updated