Chapter 10. Risk Management: Profiling and Hedging

To manage risk, we first have to understand the risks that we are exposed to. This process of developing a risk profile thus requires an examination of both the immediate risks from competition and product market changes as well as the more indirect effects of macroeconomic forces. We will begin this chapter by looking at ways in which we can develop a complete risk profile for a firm, where we outline all the risks that a firm is exposed to and estimate the magnitude of the exposure.

In the second part of this chapter, we turn to a key question of what we should do about these risks. In general, we have three choices. First, we can do nothing and let the risk pass through to investors in the ...

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