The Value of Risk Management: A Frontier Analysis

39 Pages Posted: 25 Mar 2005

See all articles by Marcel Boyer

Marcel Boyer

CIRANO, Université de Monréal

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques; University of Montreal

M. Martin Boyer

HEC Montreal - Department of Finance

Date Written: March 2005

Abstract

To address the value of risk management, we adopt a new perpspective. We characterize the relationships between operations management and real risk management activities by postulating a transformation possibility frontier for the cash flows of the firm. We show how external changes in the market parameters defining the price of risk can affect the optimal levels of the two types of real activities within the firm. The typical separation of operations management and real risk management is a potential source of organizational inefficiency. We show that the role of financial risk management is to create flexibility to alleviate this inefficiency problem. In so doing, it does contribute indirectly to the value of the firm. An important role of the CEO is then to properly coordinate operations and real risk management activities as well as financial risk management activites.

Keywords: Efficiency frontier, risk management, operations management, price of risk

JEL Classification: G22, G31, G34

Suggested Citation

Boyer, Marcel and Garcia, René and Boyer, M. Martin, The Value of Risk Management: A Frontier Analysis (March 2005). Available at SSRN: https://ssrn.com/abstract=687127 or http://dx.doi.org/10.2139/ssrn.687127

Marcel Boyer

CIRANO, Université de Monréal ( email )

1400-1130 Sharbrooke St. West
Montreal, Quebec H3A 2M8
Canada
514 985-4000 (Phone)
514-985-4039 (Fax)

HOME PAGE: http://www.cirano.qc.ca/~boyerm

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques ( email )

C.P. 6128, succursale Centre-Ville
3150, rue Jean-Brillant, bureau C-6027
Montreal, Quebec H3C 3J7
Canada
514-985-4014 (Phone)

University of Montreal ( email )

United States

M. Martin Boyer (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

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