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Risk Management Is Not Modern Invention

Risk management has existed for a long time, as seen with the Egyptian Pharaoh hedging risk and the creation of futures markets in the Middle Ages. Today, large publicly held companies are major users of risk management tools to hedge their risks, though it is debated whether corporations need to reduce their own risks since investors can manage risks individually. The Franco Modigliani and Miller theorem found that financial decisions only impact how value from real investments is distributed, not the total value created.

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40 views3 pages

Risk Management Is Not Modern Invention

Risk management has existed for a long time, as seen with the Egyptian Pharaoh hedging risk and the creation of futures markets in the Middle Ages. Today, large publicly held companies are major users of risk management tools to hedge their risks, though it is debated whether corporations need to reduce their own risks since investors can manage risks individually. The Franco Modigliani and Miller theorem found that financial decisions only impact how value from real investments is distributed, not the total value created.

Uploaded by

nicasavio2725
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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From Pharaoh to Modern

Finance
Risk management is not modern
invention

The Story of the Egyptian


Pharaoh
In the Middle Ages, hedging was
made easier by the creation of
future markets
Large publicly held companies
have emerged as the principal
users of risk management
instruments

Most new financial products are designed


to enable corporations to hedge more
effectively
It is not clear, why a corporation would
want to hedge?
The Modern Corporation and Private
Property book : the modern corporate
from organization was developed precisely
to enable entrepreneurs to disperse risk
among many small investors IF TRUE,
its hard to see why corporations
themselves also need to reduce risk
investors can manage risk on their own

Until
1970s,
finance
specialists
accepted this logic
Franco Modigliani & Miller Theorem
:
1.

The value is created on the left hand side of


the balance sheet when companies make good
investments (plant and equipment, R&D, or
market share) that ultimate increase operating
cash flows.

These decisions about financial policy


can affect only how the value created
by a companys real investments,
not for capital market

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