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July/August 2013, 
Vol. 95, No. 4
Posted 2013-09-06

The New Risk Management: The Good, the Bad, and the Ugly

by Philip H. Dybvig, Pierre Jinghong Liang, and William J. Marshall

In a 1997 Review article, the authors described the good, the bad, and the ugly features of what they called the new risk management, which is the use of financial derivatives to hedge risk in firms. Since the article was first published, the “new” risk management has become commonplace and indeed played a big role in the financial crisis. As a result, the original article is more relevant today than when it was first published. This updated version of the article contains the same examples and critical analysis as in the original article but includes an updated description of the accounting rules and suggestions for designing a risk management policy.