Abstract
This chapter commences with an analysis of whether a firm should manage risk or not—taking the Modigliani-Miller theorem as a backdrop for understanding when risk management is motivated. We go on to distinguish between risk (randomness that can be described by a probability distribution) and uncertainty (where such a probability distribution does not exist) and discuss consequences of the distinction for risk management. We then turn to different ways of managing risk and uncertainty and first examine hedging with the help of derivatives and insurance, which has been the focus of a large literature. The empirical evidence indicates that this is only one of the many ways used to manage risk, and the rest of the chapter covers alternative means of managing risk and when they are likely to add value: operational hedging, investing in flexibility and ensuring access to liquidity and new funds.