Lecture22ManagingRisk(公司金融讲义(北大,沈明高).pptxVIP

Principles of Corporate FinanceSeventh EditionRichard A. Brealey Stewart C. Myers22. Managing RiskSlides byMatthew WillSlides Edited byMinggao ShenInsuranceHedging With FuturesForward ContractsSWAPSHow to Set Up A HedgeMost businesses face the possibility of a hazard that can bankrupt the company in an instant.These risks are neither financial or business and can not be diversified.The cost and risk of a loss due to a hazard, however, can be shared by others who share the same risk. Example An offshore oil platform is valued at $1 billion. Expert meteorologist reports indicate that a 1 in 10,000 chance exists that the platform may be destroyed by a storm over the course of the next year. ? How can the cost of this hazard be sharedExample - cont An offshore oil platform is valued at $1 billion. Expert meteorologist reports indicate that a 1 in 10,000 chance exists that the platform may be destroyed by a storm over the course of the next year. ? How can the cost of this hazard be sharedAnswerA large number of companies with similar risks can each contribute pay into a fund that is set aside to pay the cost should a member of this risk sharing group experience the 1 in 10,000 loss. The other 9,999 firms may not experience a loss, but also avoided the risk of not being compensated should a loss have occurred.Example - cont An offshore oil platform is valued at $1 billion. Expert meteorologist reports indicate that a 1 in 10,000 chance exists that the platform may be destroyed by a storm over the course of the next year. ? What would the cost to each group member be for this protection.AnswerWhy would an insurance company not offer a policy on this oil platform for $100,000?Administrative costsAdverse selectionMoral hazardThe loss of an oil platform by a storm may be 1 in 10,000. The risk, however, is larger for an insurance company since all the platforms in the same area may be insured, thus if a storm damages one in may damage all in the same area. The res