Jayanth R. Varma, Vineet Virmani
Risk management in modern non-financial corporations uses a wide range of derivative and hedging instruments that go well beyond simple forward contracts and options. Popularly known as structured products, such complex derivatives manufactured by financial institutions can often be both difficult to understand and hard to assess and value. Despite their benefits in providing tailor-made solutions to risk management problems, they often come with hidden traps that have been the bane of many unwary risk managers and chief financial officers. What then explains the popularity of such products with corporate treasuries worldwide? What gaps and needs are satisfied by such products which cannot be met by simple contracts? What is the incentive of financial institutions to promote such products? Drawing on real world examples from the world of business this article would shed light on these issues and also talk about precautions that companies need to take to ensure that use of structured products for risk management does not end up creating new risks.
Corporate finance, Corporate strategy, Financial engineering, Risk management, Structured products, Tail risk
Cite this paper
Jayanth R. Varma, Vineet Virmani. (2019) Structured Products for Corporate Risk Management: a Note on Market, Classification and Tail Risk. International Journal of Economics and Management Systems, 4, 228-239