Colleen Mansfield September 19, 2013

1. Using a decentralized risk management structure, as most corporations do, the possibility that known material risks are excluded from the central risk modeling process is increased. With a centralized structure, all known material risks can be included in the analysis done, giving the risk management team a better chance of mitigating the risks the corporation faces as a whole. 2. To hedge a firms net economic exposure is to completely eliminate both the upside and downside for all exposure to fluctuating exchange rates. If a currency integral to the company depreciated, it would neither benefit nor hurt the company in question. 3. McKinsey recommends a few steps to determine whether risks are material: develop a profile of probable cash flows a profile that reflects a company-wide calculation of risk exposures and sources of cash; compare the companys cash needs with the cash flow profile to quantify the likelihood of a cash shortfall; conduct the analyses at the portfolio level to account for the diversification of risks across different business lines. 4. No, effective risk management does not guarantee against large losses, nor are those losses evidence of a failure of the risk management system. Top management will take risks as long as taking the risk increases profits. Such turns are then simply seen as unlucky. 5. Corporate board members are typically not risk management experts. The board should be able to make decisions for the company that will benefit its well-being by sustaining the company into the future and providing for growth. This is done through being informed by the companys risk management in a timely manner. Then they should be able to asses consequences of risks to make their choices.