On the Strategic Value of Risk Management

49 Pages Posted: 13 Apr 2013

See all articles by Thomas‐Olivier Léautier

Thomas‐Olivier Léautier

University of Toulouse 1 - Toulouse School of Economics (TSE)

Jean-Charles Rochet

GFRI, University of Geneva; Swiss Finance Institute; University of Zurich - Swiss Banking Institute (ISB)

Date Written: March 26, 2013

Abstract

This article examines how fi…rms facing volatile input prices and holding some degree of market power in their product market link their risk management with their production or pricing strategies. This issue is relevant in many industries ranging from manufacturing to energy retailing, where risk averse fi…rms decide on their hedging strategies before their product market strategies. We fi…nd that hedging modi…es the pricing and production strategies of …firms. This strategic effect is channelled through the risk-adjusted expected cost, i.e., the expected marginal cost under the measure induced by shareholders’risk aversion. It has diametrically opposed impacts depending on the nature of product market competition: hedging toughens quantity competition while it softens price competition. Finally, committing to a hedging strategy is always a best response to non committing, and is a dominant strategy if fi…rms compete à la Hotelling.

Keywords: Risk management, Imperfect Competition

JEL Classification: L13, G32

Suggested Citation

Leautier, Thomas-Olivier and Rochet, Jean-Charles, On the Strategic Value of Risk Management (March 26, 2013). Swiss Finance Institute Research Paper No. 13-20. Available at SSRN: https://ssrn.com/abstract=2249840 or http://dx.doi.org/10.2139/ssrn.2249840

Thomas-Olivier Leautier

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Jean-Charles Rochet (Contact Author)

GFRI, University of Geneva ( email )

102 Bd Carl-Vogt
Genève, CH - 1205
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

University of Zurich - Swiss Banking Institute (ISB) ( email )

Plattenstrasse 14
CH-8032 Zurich, Zurich 8032
Switzerland

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