Risk Management As A Significant Part Of The Overall Business Strategy Of Corporations

741 Words Mar 8th, 2016 3 Pages
Risk management forms a significant part of the overall business strategy of corporations. (Stulz, 1996) stated that “The primary goal of risk management is to eliminate the probability of costly lower-tail outcomes—those that would cause financial distress or make a company unable to carry out its investment strategy” This builds up further on the earlier studies which suggested that risk reduction is the prime motive for hedging and that hedgers pay a risk premium in return for more certainty.
“The classic economic rationale for futures markets is, of course, that they facilitate hedging- that they allow those who deal in a commodity to transfer the risk of price changes in that commodity to speculators more willing to bear such risks” (Ederington, 1979) Futures are useful for the business especially when the markets are very volatile and there are many uncertainties.
Market imperfections can cause significant impact on the businesses performances as stock prices tend to fluctuate more. Futures can therefore provide protection from unfavourable outcomes in the futures. Another benefit is Financial institutions tend to be more relaxed in terms of lending to a company which has shielded itself from some uncertainties surrounding the market. Risk-management theories suggest that by entering into future contracts/hedging it may be possible to increase the value of corporations.
Hedging can offer value addition if the external financing is more expensive than internal and if…

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