Corporate Finance, 6th Edition

Chapter 51MANAGING FINANCIAL RISKS

The worst is never certain

The graph below illustrates the high volatility of some parameters of importance for the profit and loss account of companies: exchange rate (dollar/euro), interest rate (Eonia), raw materials (copper) and services (freight rates).

Source: Data from Factset – copper spot price in $ per MT: London Metal Exchange – Fret price: Baltic Dry Index

Investors, supervisory authorities and managers pay more and more attention to risk management. This has led to:

• management teams' awareness of the importance of risk monitoring that leads to the setting up or the reinforcement of departments dedicated to risk management (internal audit, risk managers);
• strong pressure from capital markets to show transparency. Good governance advice for reinforced supervision of directors in the management of risks through the implementation of risk audit committees;
• a regulatory framework imposing communication on procedures to identify and assess risks for the firm and on strategy for management of those risks and its efficiency. The “risk factors” section of universal registration documents, and of share or bond issue prospectuses has thus become a vital section.

The evolution of risk management in recent years has consisted in increasingly segmenting risks and developing products that offer more accurate and flexible hedging for risk ...