Case Analysis On Honeywell, Inc

2225 words - 9 pages

Risk Management

Case analysis on Honeywell, Inc. and Integrated Risk Management 

Case analysis on Honeywell, Inc. and Integrated Risk Management

Risk Management

Case analysis on Honeywell, Inc. and Integrated Risk Management 

Executive Summary
Honeywell entered into an “Integrated Risk Management Program” with American International Group (AIG) in 1997. This new risk management program is to provide combined protection against Honeywell’s currency translation risk along with all traditionally-insured global risks, in a multiyear, insurance-based, integrated risk management program, which is expected to be more cost-efficient: the estimated insurance ...view middle of the document...

We suggest that after the new method of risk management have some positive practical evidences to support, Honeywell can move forward to a firm-wide long-term integrated risk management program that extends to cover all of Honeywell’s financial and operational risks.

Risk Management

Case analysis on Honeywell, Inc. and Integrated Risk Management 

1.1 What are the objectives of Honeywell’s new risk management program? Honeywell’s risk management objective is minimizing earnings volatility and its “cost of risk” which is defined by Honeywell as the sum of retained loss costs, administrative expenses, and insurance and option premia. The object of Honeywell’s new risk management program is to provide combined protection against Honeywell’s currency risks along with other more traditionally-insurable risks, in a multiyear, insurance-based, integrated risk management program, which is expected to be more cost-efficient. 1.2 How do they relate to the goal of “maximize shareholder value? If the anticipated savings of the program can be realized, and the coverage provided by the new contract is adequate, then the new risk management program can achieve the goal of “maximize shareholder value” by saving costs, as well as reducing the volatility of earnings. 2. Consider the proposed insurance contract that covers both currency and insurance risk. Aside from the specific risks covered by the proposed contract, does it differ in other ways from Honeywell’s old policy? Program comparison: Old Policy vs. Proposed Contract
Type of Risk Old Policy
Using separate, annually-renewable, insurance policies for each type of insurable risk. Each policy has a specified retention in an amount that ranged between zero and $6 million. An at-the-money basket-option of 20 currencies that mature quarterly Taking a long position in the foreign currency to offset the risk of future payment. Active hedging or insuring of risks Active hedging or insuring of risks Managed Operationally

Proposed Contract
A 2.5-year insurance-based contract that covered all traditionally- insured global risks and currency translation risk. The proposed program has an annual aggregate retention of $30 million, rather than a separate retention for each individual risk.

Traditionally-Insured Risks

Currency Risks

Translation Risk Transaction Risk

Other Financial Risks (interest-rate risk, credit risk, liquidity risk) Pension Fund Risk Other Risks

From the above comparison, the proposed contract differs in the following ways from Honeywell’s old policy: A. The proposed contract provided a relatively new concept of enterprise risk management grouping many risks together into a portfolio of risks, rather than managing each risk separately. B. The risk management tools of old policy are a mixture of insurances and options while the proposed contract is an insurance with an annual aggregate retention of $30 million, rather

Risk Management
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