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Honeywell Case Summary

Honeywell, Inc. and Integrated Risk ManagementThe finance committe of Honeywell, Inc. must decide whether to approve a new type of risk management contract or not. This new risk management program is to provide combined protection against Honeywell’s currency translation risk along with all traditionally-insured global risks, in a multiyear, insurance-based, integrated risk management program. The committee’s vote would depend upon whether the anticipated cost savings of the program could be realized, and whether the coverage it offered was adequate.
According to the Exhibits, Honeywell had suffered some risks and volatility. New risk management seemed to be on demand for stabilization. The case study suggests the comparison of the traditional and newly suggested risk management method and the changing points. Also it explains how those things may be valuable.
Honeywell’s new risk management basically suggested ‘integration’. Specifically, new risk management suggested 2.5-year insurance-based contract that covered all traditionally insured global risks and currency translation risk (in other words, treasury-based integrated program with trigger option). While traditional risk management tools are a mixture of separate insurances and options, the proposed contract is an insurance with an annual aggregate retention of $30 million with the option. The old policy is repeated annually while the proposed contract is in a 2.5-year period. Additionally, the premium is cheaper than the traditional risk management as through ‘portfolio effect’.
According to the simulating results exhibit 9, we can find that the standard deviation of total cost of risk for the proposed program is $3,819,568 while the one for the existing program is 15,793,879. The proposed program can reduce the total risk of the firm if the simulating results are real. To add, the simulated results also show that the estimates annual premium savings is about 20%.
Thus, it is real challenge…


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