This chapter provides a broad overview of the many different types of corporate decisions involving risk management. Each decision sits in a different context, and the place of risk in each is different. Sometimes the key question is how to properly measure and price risk. Other times the key question is how to sell off or hedge risk. Still other times the problem is to somehow craft a strategy that carefully segments different risks.
We provide a short survey of what is known about how non-financial corporations use derivatives and implement hedging strategies. At the same time, this chapter provides an antidote to the usual representation of corporate risk management as all about hedging the company’s value. Key risk activities of the firm are re-presented to identify how risk management adds value to the company in many different ways.
In 2009, as the financial crisis began to set off a spate of job losses and auto sales in the US began a sharp decline, the automobile manufacturer Hyundai came up with an unusual marketing strategy. It promised potential buyers that they could return their new vehicles at no cost and with no penalty to their credit rating if they lost their job or took a significant hit to their income within one year of the purchase. “The program covers every buyer of a leased or financed vehicle who involuntarily loses a job; becomes physically disabled; loses a driver’s license for medical reasons; is transferred to another country; is self-employed and files for bankruptcy; or dies in an accident. The guarantee covers the difference between the value of the car and the amount the buyer owes, or negative equity, up to a maximum of $7,500.” (New York Times, Feb 5, 2009) The company chose this guarantee over cutting the price directly through rebates and the like. Sales jumped in January after having slumped in December, and Hyundai quickly doubled its market share.
Later that year, both GM and Ford joined Hyundai in offering the job insurance. “Each of the automakers contracts with a third party to insure the protection.” (USA Today, April 1, 2009) Other companies outside of the automobile industry started looking to similar arrangements.
These recent arrangements are all similar in spirit to the case of Bombardier’s “no snow” rebate plan described in Chapter 2.