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Risk Management Essay

856 words - 4 pages

Risk management has developed into business segments that differ from the traditional insurance applications. Georgia Pacific (GP) has more than 400 locations and 61,000 employees in North America and Europe. Risk management applications in the areas of foreign currency and political issues need to be addressed to be a success in the international market. Risk management is ultimately the economic impact on the company, so methods have been developed companies have used to adapt to the changing business environment.
Financially GP uses a credit line and bonds for funds when cash flow is unable to cover capital requirements. The line of credit is at 2.3% but has restrictions on debt ...view middle of the document...

com/black-scholes.html , giving the option value of .3757 for a stock price of $22.28, exercise price of $22.50, risk free rate of 4.5%, 20% volatility in stock price, and 26 days remaining on the option. With such a short time left to the call termination this call option does not provide much of a return.
The next option can combine hedging and decision trees to determine cash flow potential. Selling paper products to distributors is done at “into stock” prices that are set at market levels distributors can sell to the general public. Large end users get price breaks based on volume because they buy the products for less than the “into stock price” and the distributor is given a rebate per case after selling the product. This is GP’s use of hedging because the distributor pays full price for the products and receives money back when products are sold to customers with contract pricing. Some distributors are rebated on almost 100% of the products purchased from GP. Because different contract prices are setup for customers, GP’s potential cash flow can be calculated by filling the tree branches with the different amounts of rebates paid to the distributors depending on who they sold the products to. When a distributor has a large number of customers eligible for contract pricing simulations can be setup using computer models and probability to determine potential rebates paid to distributors.
Risk management can be incorporated into sales techniques to help increase market share or gain a foot in the door with a potential customer. Training sales people to look at aspects of customer’s works and provide items that can aid...

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