Richard Friberg

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.

Managing risk in and across organizations has always been of vital importance, both for individual firms and for the globalized economy more generally. With the global financial crisis, a dramatic lesson was learnt about what happens when risk is underestimated, misinterpreted, or even overlooked. Many possible solutions have been competing for international recognition, yet, there is little empirical evidence to support the purported effectiveness of these regulations and structured control approaches, which leaves the field wide open for further interpretation and conceptual development. This comprehensive book pulls together a team of experts from around the world in a range of key disciplines such as management, economics and accounting, to provide a comprehensive resource detailing everything that needs to be known in this emerging area. With no single text currently available, the book fills a much needed gap in our current understanding of strategic risk management, offering the potential to advance research efforts and enhance our approaches to effective risk management practices. Edited by a globally recognized expert on strategic risk management, this book will be an essential reference for students, researchers, and professionals with an interest in risk management, strategic management and finance.