Last November, Robert Merton, the Nobel prize-winning
finance professor, wrote an article for the Harvard Business Review arguing that a bolder approach to risk management could double, or even triple, a company's ability to invest in its core business. Rather than just hedging against the risk of interest rate and commodity price fluctuations, he wrote, derivatives could be used to transfer away all of the risks in which a company does not have a natural advantage–goodbye to the risk of supplier delays or business interruption and the risk of fraud or lawsuits! All of these non-core risks could be shipped off to someone else, leaving the company with more capital to invest in the risks it is in business to take–whether that's designing and marketing automobiles, mining or brewing beer.
Alert readers may have spotted a flaw in Merton's argument: The derivatives needed to transfer these risks don't exist. But that's a picture some specialists are trying to change.
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