Risk Management and Value Creation in ... - Arabictrader.com

Foundations for Determining the Link between Risk Management and Value Creation 31
should be measured 121 and, what is equally important, what the goals of
risk management should then be and which one of the various ways to conduct
risk management should be applied. We will describe the various options in
the subsequent sections and return to the question of what should be done
in detail in Chapter 6.
Goals of Risk Management in Banks
The choices related to the risk-management goal can be differentiated along
the following dimensions: 122
■
■
■
■
The goal variable
The (dominant) stakeholder perspective
The risk dimension
The risk-management strategy
We will discuss each of these dimensions in turn below.
Choice of the Goal Variable According to survey evidence, 123 firms view the
primary goal of their risk-management efforts as the reduction of the volatility
of the company’s cash flows and its earnings. Typically, firms name the
following subdimensions:
■
■
Reduction of the volatility of (near-term) operating income 124 /(reported
or accounting) earnings. 125
Simple reduction of the volatility of (free) cash flows: 126 Risk management
aims to protect the bank’s balance sheet against severe losses
of a monetary nature (e.g., shocks in foreign exchange rates) and the
121 We will address this question in detail in Chapter 5.
122 We neglect here how risk management ranks against other financial objectives in
banks.
123 See Glaum and Förschle (2000), pp. 19+; also see Bodnar et al. (1996) and (1998)
for the U.S. market. Note that these surveys exclude financial institutions. We will
discuss this problem in more detail in the section “Empirical Evidence.”
124 See Fenn et al. (1997), p. 23, who refer to Dolde (1993) who finds that the probability
of using derivative increases with the volatility of firms’ operating income.
Even though this is consistent with hedging motives for using derivatives, this assumes
that the volatility of operating income is itself not affected by the use of
derivatives (which is usually, although not always, the case).
125 See Smith (1995), p. 20, Glaum and Förschle (2000), pp. 19+.
126 See Smith (1995), p. 20, Fenn et al. (1997), p. 13, Glaum and Förschle (2000), pp.
19+.