RISK MANAGEMENT POLICY: PFIZER, INC

This research considers four risk management tools that Pfizer, Inc. conceivably could incorporate in the firm's risk management policy. Each of the risk management tools is not necessarily appropriate for all forms of risk; however, each tool is appropriate for one or more forms of risk faced by the firm. Risk categories considered for the application of the risk management tools by Pfizer, Inc. are (1) corporate, (2) economic, (3) currency, (4) political, and (5) global business risks.

The Black-Scholes (637) Option Valuation Model assumes that logarithmically (log) normal distribution characterize security returns. If the real underlying distribution differs significantly from log normal, then the Black-Scholes (637) option valuations may exhibit a bias relative to true values.

Five items of information are required to calculate the value of a call option. These items of information are (one and two) the relationship between the market price and the exercise price (two items of information expressed as a single relationship), (3) the time to maturity of the option, (4) the relevant interest rate, and (5) the volatility of the price of the underlying stock (Reilly 199). This model is as follows:

Po = [Ps][N(d1)] - [E][antiln (- rt)][N(d2)],

Po = the market value of the option;

Ps = the current market price of the underlying common stock;

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of other publicly listed firms (Gurrin 22), which affects both corporate and economic risk The firm can apply the model of evaluate business decisions related to global business strategies by assessing the probably effects on the value of the firm of alternative outcomes, as such outcomes hold the potential to affect currency risks, political risks, and global business risks (Chance 35-47) Decision Trees Decision tree analysis provides a procedure for the incorporation of probabilistic events into a decision-making framework. Decision trees break broad decisions down into a sequence of subsidiary decisions. At each decision point, branches represent the different alternatives. Assigned payoffs to each possible outcome establish values for alternatives. Decision trees deal with uncertainty by assigning probabilities to the occurrence of each alternative, at each decision point in the tree (Clemons 22). The concept of expected monetary value (EMV) determines the best tradeoff between risk and probability. A rollback (starting at the end of the decision tree, and working backward) procedure selects strategies that maximize EMV (defined as average payoff). Pfizer, Inc. can usefully apply decision trees in the evaluation of
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Approximate Word count = 1210
Approximate Pages = 5 (250 words per page)