cfm10e_aiseIM21rev.doc

CHAPTER 21
RISK MANAGEMENT
ANSWERS TO QUESTIONS:
1. Managers should seek to manage risks that are large enough that they have the potential to cause financial distress or failure of the firm. Because the costs associated with financial distress and/or firm failure are typically quite large, there is good reason to try to hedge these risks. Hedging risks also helps to assure that a firm will have adequate cash flows to make needed investments. Finally, it is often useful to hedge risks that are outside of the control of management, such as interest rate or currency exchange rate risks, so that managers can properly focus on issues that are under their control.
2. The acquisition of additional information can reduce the probability distribution of potential es from a risky business decision. For example, Krispy Kreme may be considering expanding to the Japanese marketplace. By investing in market research, test marketing, and similar techniques, they can learn the unique factors associated with ess in that marketplace before having mit millions of dollars to build the facilities to serve this market.
3. The principle of diversification is a valuable risk management tool. By diversifying the markets a firm serves, the sources of supply, the location of manufacturing facilities, and the breadth of the product line, a firm can reduce the variability of its operating e over time