... (1996) argues that this should be the "goal of corporate risk management-namely, the elimination of costly lower-tail outcomes" (p. 8). Second, fluctuation in exchange rates have normally been associated with very dramatic industry turnover. Countries such as South Korea and Thailand have seen their banks become insolvent as a result of currency devaluations that greatly increased the local currency value of their dollar denominated liabilities. In the early 1980's some firms found themselves in financial distress for not hedging against the strengthening of the dollar. In September 1992 many European firms were affected by the devaluations associated with the European Monetary Mechanism crisis. Hedging downside risk would have helped banks and firms in these episodes stay financially afloat. Discussed in this study is a standard model of downside risk that is consistent with value-maximizing firms. The model focuses on managerial loss aversion (Kahneman and Tversky (1979, 1992)). The model ...

See this essay or coursework document in full right now