Enrique C. Falla
Executive vice president & CFO, Dow Chemical Co.

Dow has been utilizing value-at-risk as a measurement of financial risk for the last five years. It was originally designed to address market risk of cash and derivative instruments, but was subsequently used for the calculation of potential credit risk as well as market risk for derivative instruments. At Dow, this concept has been given several applications. First, assessing risk/return trade-off of alternative financial strategies; second, delegating authority for financial risk management activities; third, controlling and communicating financial risk on a global basis across foreign exchange and interest rate instruments and exposures.

Recognizing that VAR measures primarily the normal market behavior, we decided to complement this measure with an assessment of abnormal market fluctuations through the use of stress testing. This measurement covers several abnormal events like the instability of correlation, market price changes in excess of two standard deviations, volatility changes, yield curve shifts, etc. In addition, stress testing is being used for evaluating the market price impact of convex payout profiles associated with options and bonds.

At Dow, we use VAR as the most comprehensive measurement of financial risk, complemented by stress testing.

Jesse Greene
Treasurer, Eastman Kodak

It is true that many non-financial companies don't have to be as rigorous as do financial companies about risk measurement, but it absolutely is useful. We do use the value-at-risk approach. We looked at many.

In our main balance sheet, Kodak has no interest rate derivatives right now. We negotiated settlement of 40 derivative instruments with 20 counterparties in 1994. Our forex hedges were terminated in 1995. We think that given the balance sheet structure and the earnings structure of the company, it is unnecessary to incur the expenses of hedging.

We also use VAR to gauge the impact of commodity prices on the company, especially that of silver. But there are five or six major commodities for Kodak. We have reviewed their volatilities and their correlation with each other, and we determined we could absorb those in our forex activities, so we do not hedge those.

At Kodak we do stress testing. We test for current volatilities and against scenarios from a balance sheet and earnings perspective. First, we want to know what our exposures are, whether they are currencies or commodities. We gather accurate information. Then we look at them from a combined perspective, and study the correlations between the various ones. Then we look at the typical average volume for six or 12 months to see what a typical year looks like. We also look at the last ten years to test for the worst case scenario. And, for example, we might conclude that we should not hedge for the typical case, but should for the worst case.

Eugene Beard
Executive vice president, finance and operations, The Interpublic Group of Companies, Inc.

We are aware of VAR and have looked at it, but do not currently utilize it as part of our currency risk management program. We think VAR is more applicable for firms with fixed long-term exposures or companies with very large derivatives portfolios, neither of which apply to Interpublic. Interpublic regularly analyzes the potential impact of currency movements on overseas earnings exposures. The treasury staff analyzes budgeted earnings using a variety of market assumptions and scenarios.

Then we implement hedging strategies accordingly, using pound sterling, DM and yen as key hedging currencies. Existing hedge positions are also tested in this manner. Extreme as well as normal market scenarios are included in these analyses.

Interpublic's foreign currency hedging program is defensive; its primary focus is to reduce the impact of currency fluctuations on earnings. A key part of this process is identifying and monitoring major exposures and quantifying marked to market daily, and market impact on major exposures are updated and analyzed regularly, and all GAAP requirements are met.

Judy Sprieser
Senior vice president and CFO, Sara Lee Corp.

Our base exposures arising from our business activities are monitored carefully; we have upgraded our internal systems. We then use derivatives contracts to offset those exposures. We do have some valuation models.

But we avoid the esoteric. We tend to stick with forward markets that can be valued in a conventional way. We have entered into a couple of option-type contracts and we have a model to evaluate these. How accurate the model will be is a matter of some speculation.

With derivatives there are four types of risks. First, the mark to market risk. This is usually offset by the loss or gain on the underlying exposure. Next is valuation risk, and that's generally what we mean when we talk about VAR. Again, we generally stay away from the exotic. The third and fourth types are counterparty and settlement risk. We have strict limits regarding the quality and amount of everything in our portfolio­-investments, swaps, hedges and loans.

Betsy Glaeser
Manager of capital markets and investment banking, Mobil Corp.

Within Mobil's treasury, we have been using VAR for nearly two years to measure interest rate exposures versus our benchmarks. Notional principal disclosure of outstanding debt and derivatives, particularly the disaggregated format required in 1994 reporting, can be misleading. Use of VAR gives a better picture of our hands-on approach to managing risk. We also stress test to further our understanding of exposures to parallel and non-parallel shifts in the yield curve.

In our 1994 annual report we noted that the company measures its value-at-risk using simulation techniques that project the probability of expected changes in values from market movements on financial exposures that vary from management's defined benchmarks. These benchmarks are standards that have been established by management and represent the risk profile of the environment in which Mobil operates and the assets that are being financed. Value-at-risk is defined as the maximum potential gain or loss from a one-day market movement in interest and currency rates that would cover 99.7 percent of all such movements measured against the benchmarks. At year end, the VAR, as measured against these defined benchmarks, was $6 million.

Risk-based limits of authority were approved by the board of directors, replacing all prior authorities linked to principal levels for both debt issuance and derivatives. We measure risk using a covariance model similar to JP Morgan's RiskMetrics Model. We estimate correlations and volatilities based on three years of historical interest rate data. We use these to calculate the risks (to three standard deviations) of positions that are unhedged versus the benchmark. For interest rates, the benchmark is 50/50 fixed/float in each maturity. We also look at subsets of the portfolio (e.g., by currency, affiliate, transaction type, maturity, optionality, etc.) to comprehend some of the subtler risks within the debt structure. Our internal risk system (developed in-house by the capital markets staff working closely with Mobil's internal systems group) enables us to calculate optimal hedges to reduce our risks using interest rate swaps and futures.

John Cooper
Senior vice president, finance, US Generating

We don't use VAR because our use of derivatives is to fix the interest rate on our debt, rather than a speculative use. Our derivatives position is basically just interest rate swaps.

While we don't see the need for VAR right now, we may someday. As the independent power industry begins to take on more commodity risk, the need will arise. Right now we're pretty well hedged through our power contracts.