RISK MANAGEMENT - COORDINATING CORPORATE-INVESTMENT AND FINANCING POLICIES

This paper develops a general framework for analyzing corporate risk m anagement policies. We begin by observing that if external sources of finance are more costly to corporations than internally generated fund s, there will typically be a benefit to hedging: hedging adds value to the extent that it helps ensure that a corporation has sufficient int ernal funds available to take advantage of attractive investment oppor tunities. We then argue that this simple observation has wide ranging implications for the design of risk management strategies. We delineat e how these strategies should depend on such factors as shocks to inve stment and financing opportunities. We also discuss exchange rate hedg ing strategies for multinationals, as well as strategies involving ''n onlinear'' instruments like options.