a framework for risk management - depaul university.pdfVIP

In recent years, managers have become increas- jus t that . The General Accounting Office reports ingly aware of how their organizations can be buf- that between 1989 and 1992 the use of derivatives- feted hy risks beyond their controi . In many cases, among them forwards, futures, options, and swaps - fluctuations in eeonomie and financial variables grew by 145% . Much of that growth came from such as exchange rates, interest rates, and commod- corporations: one recent study shows a more than ity prices have had destabilizing effects on corpo- fourfold increase between 1987 and 1991 in their rate strategies and performance . Consider the fol- use of some types of derivatives. lowing examples : In large part, the growth of derivatives is due to D In the first half of 1986, world oil prices plummet- innovations by financial theorists who, during the ed by 50% ; overall, energy prices fell by 24% . While 1970s, developed new methods-such as the Black- this was a boon to the economy as a whole, it was Scholes option-pricing formula-to value these com- disastrous for oil producers as well as for companies plex instruments . Sueh improvements in the tech- like Dresser Industries, which supplies ma- nology of financial engineering have helped spawn chinery and a new arsenal of risk-management weapons . Unfortunately, the insights of the financial engi- neers do not give managers any