This chapter continues the discussion of predominant risk-transfer markets and provides a general overview of various insurance and derivative instruments with more detailed explanations of the mechanics behind some of the most common corporate hedging techniques. The observed convergence between conventional insurance and capital market instruments is explained and the mechanisms driving the development of new alternative risk-transfer instruments are discussed further. The integrated use of different risk-transfer approaches to manage corporate exposures is outlined with examples of coordinated risk management practices.
Market-related risk exposures
A series of financial techniques have evolved that allow corporate management to deal with market-related exposures. By market-related risks we refer to events that are relatively well described and where event frequencies and associated losses are measured and documented on a regular basis. In other words, we are here dealing with measurable exposures that correspond to the traditional concept of risk as opposed to uncertainty that is impossible to measure because the unpredictable nature of events defeats measurability. In the case of hazards and casualties, the registration of events and associated losses is carried out by professionals in the insurance industry, often supported by industry-wide statistics and public databases. In the case of financial markets, the market prices of foreign currencies, interest rates and commodities are registered by individual market participants, stock exchanges, official statistics, etc. Price developments, trends and patterns derive from the analyses of defined price indices registered with regular time intervals, for example, minute-by-minute, hourly or daily.