Merck Uses @RISK for Value-at-Risk
For a company the size of Merck, the multinational pharmaceutical giant based in Whitehouse Station, New Jersey, awareness of value-at- risk (VAR) is crucial to the performance of its risk management programs. And of course, foreign exchange rates are one of the most volatile forces at work in any assessment of value-at-risk.
Art Misyan, Director of Foreign Exchange at Merck, is responsible for the company’s ongoing surveillance of its currency risks. He has been using @RISK for years. “We love it because it incorporates distribution fitting and gives us the flexibility to evaluate alternative distributions on screen.” He also finds it useful for presentations to Merck’s senior managers, who are quite conversant with probability and risk analysis.
VAR analyses have never been simple, and Art points out that in the last few years they have needed to be increasingly sophisticated. “We are managing currency risk in both the balance sheet and in future revenues.” Merck’s currency exposures span at least 30 countries, and while simulating hedged currency risks on the balance sheet is relatively straightforward, he says, simulating hedged cash flow currency risk is not.
The Director of Foreign Exchange at multinational pharmaceutical giant Merck uses @RISK to evaluate value-at-risk (VAR) for currency risks.
Director of Foreign Exchange, Merck
We love [@RISK] because it incorporates distribution fitting and gives us the flexibility to evaluate alternative distributions on screen.
“Simple VAR analysis is not good enough,” he says, and this is because of the advent of the FAS 133 accounting standard for derivative investments. New approaches to assessing hedging strategies have also created the need for more sophisticated analyses. Earlier methods of evaluating hedging strategies predicted economic value at inception and completion. Now, current practice is to project both economic and accounting hedge performance through time, looking prospectively and retrospectively. This adds significantly to the number of variables, a task to which @RISK is well-suited. Art says that a typical simulation now includes analysis of option time decay and the volatility of the option’s price components.
As ways of thinking about VAR at Merck evolve from complex to downright complicated, @RISK remains Merck’s analytic tool of choice.