ERM Frameworks and Responses to risk [71]

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Bullet points include: In a frictionless world in which the Modigliani-Miller theorem applies hedging should not affect firm value For it to be worthwhile deriving optimal amount to hedge / reinsure we need to be in (or merely have our client/employer believe that we are in?) a world in which risk management matters Mathematical approach developed by, e.g. Froot and Stein (1998). When costly to raise equity because of market frictions, firms should hedge away tradable asset (‘market’) risk and only assume risk in non-traded assets or liabilities in which they have specialist knowledge or expertise Presumably likewise for a mismatched tradable position

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