The role of risk preferences and flexibility for risk management: Lessons from a custom manufacturing environment

In this paper, we study the management of financial risks of a custom manufacturer in the specialty chemicals industry arising from increased volatility of profits caused by market uncertainty and growing competitive pressure due to globalization. We argue that such risk management can be established either by creating and utilizing flexibility or by adjusting the risk preferences. Using a model-based approach, we operationalize flexibility and risk preferences to show their effects on the profit/risk and the decision making of a firm through a stylized example motivated by the specialty chemicals business.