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Corporate Risk Management resources

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PA RT I I I Practitioner Perspectives Imerck” (chapter 12), Judy Lewent and John Kearney describe the company’sn “identifying, mea sur ing, and hedging currency risk at effort to understand and manage the effect of exchange rate volatility on world- wide revenues and earnings. In a thought pro cess that parallels the one laid out in preceding chapters (by Smith, Stulz, and others), Merck’s trea sury arrived at the following conclusions: (1) the home currency value of cash fl ows regularly repatriated by its many overseas subsidiaries was vulnerable to a strengthening of the U.S. dollar; (2) although stock market analysts and investors do not ap- pear much concerned about the exchange- related volatility of reported earn- ings, volatility in repatriated cash fl ows could interfere with the company’s ability to make long- term investments in research and development and mar- keting (the principal sources of the company’s future earnings); and (3) consis- tent with Stulz’s argument that risk management should be designed to eliminate the lower tail of the distribution (and not to minimize variance), hedging (only part of ) its currency options was the most cost- effective means of ensuring the company’s ability to carry out its long- range strategic plan. In “Corporate Insurance Strategy: The Case of British Petroleum” (chap- ter 13), Neil Doherty and Clifford Smith describe a radical shift in British Pe- troleum’s approach to insuring property and casualty losses, product liability suits, and other insurable events. Conventional corporate practice—and until recently the long- standing risk management policy of British Petroleum (BP)—was to insure against large losses while “self- insuring” smaller ones. In this chapter, Doherty and Smith explain why BP chose to fl out the conven- tional wisdom and now insures against most smaller losses while self- insuring larger ones. The BP decision came down to factors affecting the market supply of in- surance as well as the corporate demand for it. On the demand side, the au- thors demonstrate that the primary source of demand for insurance by large

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