The Value of Real and Financial Risk Management

37 Pages Posted: 2 Jan 2006

See all articles by Marcel Boyer

Marcel Boyer

CIRANO, Université de Monréal

M. Martin Boyer

HEC Montreal - Department of Finance

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques; University of Montreal

Date Written: December 2005

Abstract

We characterize a firm as a nexus of projects with their associated cash flows. Production and operations activities and real risk management activities distribute cash flows over states of nature and time periods, leading to a transformation possibility frontier similar to a production function. We show how changes in the price of risk affect the value maximizing levels of real activities. The typical separation between management activities concerning production and operations on one hand and real risk on the other is a source of efficiency gains but causes coordination problems. Financial risk management creates value by alleviating these coordination problems. It also allows a firm to meet cash flow-at-risk or value-at-risk constraints at no cost.

Keywords: Risk Management, Firm Value, Coordination, Value at Risk

JEL Classification: G22, G31, G34

Suggested Citation

Boyer, Marcel and Boyer, M. Martin and Garcia, René, The Value of Real and Financial Risk Management (December 2005). Available at SSRN: https://ssrn.com/abstract=873356 or http://dx.doi.org/10.2139/ssrn.873356

Marcel Boyer (Contact Author)

CIRANO, Université de Monréal ( email )

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HOME PAGE: http://www.cirano.qc.ca/~boyerm

M. Martin Boyer

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques ( email )

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3150, rue Jean-Brillant, bureau C-6027
Montreal, Quebec H3C 3J7
Canada
514-985-4014 (Phone)

University of Montreal ( email )

United States

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