University of Illinois at Urbana-Champaign

College of Business- Department of Finance

Finance 590 - ERM D’Arcy -Vonnahme

Spring 2005

Case Study Number Two - United Grain Growers (UGG) Assignment Due Date: April 5, 2005

Read “Enterprise Risk Management: The Case of United Grain Growers” by Scott Harrington, Greg Niehaus and Kenneth Risko, Journal of Applied Corporate Finance, Winter 2002.

Refer to Table 27.1 on page 594 of Risk Management and Insurance, Second Edition, by Scott Harrington and Greg Niehaus, McGraw Hill-Irwin, 2004.

Questions for analysis and discussion:

1. Use the data in Table 27.1 to calculate the correlation coefficients between industry grain shipments and UGG’s grain shipments and between crop yields and UGG’s grain shipments.

2. Given that any method of reducing the weather exposure will be costly, what are the benefits to UCG’s diversified owners from reducing the weather risk? In other words, what characteristics of UCG’s operations and strategy would make risk reduction potentially beneficial to UCG’s owners who hold well-diversified portfolios?

3. Should UCG’s rather unique ownership structure influence the decision to reduce the weather risk exposure?

4. How could the parties structure a weather derivative to cover the exposure? More specifically, what would be the underlying index? Would the contract be a put, call or forward? Would they buy or sell? Would a separate contract for each province and/or each crop be needed?

5. What are the advantages and disadvantages of integrating grain volume coverage with firm’s other insurance coverages? Instead of having separate policies with separate deductibles and limits for the various exposures what are the advantages and disadvantages of bundling all of the firm’s exposures in one policy with one deductible and one limit?

6. Ignoring the cost differences, are there any advantages of the insurance contract approach versus the use of weather derivatives?

7. What are the advantages of a traditional approach, transfer of risk through insurance, versus other possibilities for managing the key risk UGG identified?

8. The risk committee in the initial stages of the ERM process identified a number of risks that UGG faces on a regular basis. Will the ERM process work effectively for the other key risks? Explain your response.

9. Regulation and government control represent significant risks to many industries and the companies operating within those industries. Will the ERM process work in the context of this type of risk?