Kenneth A. Froot

Professor of Business Administration, Retired

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Kenneth A. Froot is André R. Jakurski Professor of Business Administration at Harvard University's Graduate School of Business Administration. He teaches courses in Capital Markets, International Finance, and Risk Management. Previously, he served as Director of Research, and held the Industrial Bank of Japan Professorship in Finance and the Thomas Henry Carroll-Ford Foundation Visitor's Chair at Harvard. At MIT, he held the Ford International Development Chair. He has taught executive education programs at MIT, Harvard, Princeton, Dartmouth, and for corporations and institutions in addition to his regular teaching of MBAs and Ph.D.s.

Professor Froot received his B.A. from Stanford University and his Ph.D. from the University of California at Berkeley. He spent the 1988-1989 academic year as an Olin Fellow at the National Bureau of Economic Research, where he is Research Associate and Chair of the NBER’s Insurance Group. His research on a wide range of topics in finance, risk management, and international markets has been published in many journals and books. He is Editor of the Journal of International Financial Management and Accounting, Associate Editor of the Journal of International Economics, and of The Financing of Catastrophe Risk, Foreign Direct Investment, and The Transition in Eastern Europe, Vols. 1 and 2.

Professor Froot is a founding partner of FDO Partners, LLC and State Street Associates, firms producing investment and knowledge resources for global investors. Froot has worked with companies, countries, and official institutions, including the International Monetary Fund, the World Bank, and the Board of Governors of the Federal Reserve on international financial risk and investment management issues.  He has also acted as a Financial Adviser to the Prime Minister of the Republic of Slovenia and to the Finance Minister of Poland, and served on the staff of the US President's Council of Economic Advisers and the Economic Advisory Board of the Export-Import Bank of the US.

Publications

Academic Journal Articles

  1. How Institutional Investors Frame Their Losses: Evidence on Dynamic Loss Aversion from Currency Portfolios

    Currency investors exhibit a tendency to cut risk by pairing both longs and shorts following losses and a weaker tendency to add risk following gains. By differentiating between position level, portfolio level, and aggregate cross-portfolio losses in currency investments, we demonstrate that this dynamic loss aversion spans multiple frames of reference. Losses are not compartmentalized; rather a loss in one currency may impact trading in another. We also show that while the impact of a loss on subsequent trading decisions does linger, the affect declines sharply after a losing position is closed.

    Keywords: Loss aversion; Decision Choices and Conditions; Currency; Investment; Risk Management; Behavioral Finance;

    Citation:

    Froot, Kenneth A., J. Arabadjis, S. Cates, and S. Lawrence. "How Institutional Investors Frame Their Losses: Evidence on Dynamic Loss Aversion from Currency Portfolios." Journal of Portfolio Management 38, no. 1 (fall 2011): 60–68. View Details
  2. The Intermediation of Financial Risks: Evolution in the Catastrophe Reinsurance Market

    In this paper, I provide evidence concerning the imperfections in the reinsurance market. I try to get at some of the root causes of these imperfections, e.g., the behavior of ratings firms and the agency problems associated with the corporate form of ownership. I also summarize the recent evolution of intermediation for catastrophic risk. A simple framework for an integrated theory of optimal financial policy for insurers and reinsurers is discussed. Finally, policy implications for intermediation of financial risks in view of evolving financial solutions for catastrophic risk are proposed.

    Keywords: Catastrophe Risk; corporate finance; Banking and Insurance; Hedging; banking; Financial Markets; Insurance; Policy; Risk Management; Natural Disasters; Cost of Capital; Asset Pricing; Insurance Industry;

    Citation:

    Froot, Kenneth A. "The Intermediation of Financial Risks: Evolution in the Catastrophe Reinsurance Market." Risk Management and Insurance Review 11, no. 2 (fall 2008): 281–294. View Details
  3. Style Investing and Institutional Investors

    This paper explores institutional investors' trades in stocks grouped by style and the relationship of these trades with equity market returns. It aggregates transactions drawn from a large universe of approximately $6 trillion of institutional funds. To analyze style behavior, we assign equities to deciles in each of five style dimensions: , value/growth, cyclical/defensive, sector, and country. We find, first, strong evidence that investors organize and trade stocks across style-driven lines. This appears true for groupings both strongly and weakly related to fundamentals (e.g., industry or country groupings versus size or value/growth deciles). Second, the positive linkage between flows and returns emerges at daily frequencies, yet becomes even more important at lower frequencies. We show that quarterly decile flows and returns are even more strongly positively correlated than are daily flows and returns. However, as the horizon increases beyond a year, we find that the flow/return correlation declines. Third, style flows and returns are important components of individual stock expected returns. We find that nearby style inflows and returns positively forecast future returns while distant style inflows and returns forecast negatively. Fourth, we find strong correlations between style flows and temporary components of return. This suggests that behavioral theories may play a role in explaining the popularity and price impact of flow-related trading.

    Keywords: Forecasting and Prediction; Behavioral Finance; Stocks; Investment Return; Market Transactions; Performance Expectations; Personal Characteristics; Financial Services Industry;

    Citation:

    Froot, Kenneth A., and Melvyn Teo. "Style Investing and Institutional Investors." Journal of Financial and Quantitative Analysis 43, no. 4 (December 2008): 883–906. (Revised from: Equity Style Returns and Institutional Investor Flows, Harvard Business School Working Paper No. 04-048, June 2004.) View Details
  4. On the Pricing of Intermediated Risks: Theory and Application to Catastrophe Reinsurance

    Keywords: Catastrophe Risk; corporate finance; Banking and Insurance; Hedging; banking; Insurance; Financial Markets; Insurance; Policy; Risk Management; Natural Disasters; Cost of Capital; Asset Pricing; Insurance Industry;

    Citation:

    Froot, K. A., and P. O'Connell. "On the Pricing of Intermediated Risks: Theory and Application to Catastrophe Reinsurance." Special Issue on Dynamics of Insurance Markets: Structure, Conduct, and Performance in the 21st Century Journal of Banking & Finance 32, no. 1 (January 2008): 69–85. (Revised from NBER Working Paper No. 6011, April 1997, Harvard Business School Working Paper No. 98-024, 1997.) View Details
  5. Institutional Portfolio Flows and International Investments

    Keywords: Loss aversion; international investment; Portfolio Investment; Asset allocation; Decision Choices and Conditions; Currency; Investment; Risk Management; Behavioral Finance; Asset Pricing;

    Citation:

    Froot, K. A., and T. Ramadorai. "Institutional Portfolio Flows and International Investments." Review of Financial Studies 21, no. 2 (April 2008): 937–971. (Formerly The Information Content of International Portfolio Flows, revised from NBER Working Paper No. 8472, September 2001, Harvard Business School Working Paper No. 03-006, 2002, revised December 2005.) View Details
  6. Risk Management, Capital Budgeting and Capital Structure Policy for Insurers and Reinsurers

    Keywords: Risk Management; Capital Budgeting; Cost of Capital; Policy; Insurance; Asset Pricing; Insurance Industry;

    Citation:

    Froot, K. A. "Risk Management, Capital Budgeting and Capital Structure Policy for Insurers and Reinsurers." Journal of Risk and Insurance 74, no. 2 (June 2007): 273–299. (Winner of Robert C. Witt Award Given annually for the best feature article in the Journal of Risk and Insurance presented by American Risk and Insurance Association. Revised from NBER Working Paper no. 10184, Harvard Business School Working Paper no. 04-035, December 2003.) View Details
  7. Decomposing the Persistence of International Equity Flows

    Keywords: asset pricing; Equity Investment; Forecasting and Prediction; Behavioral Finance; Stocks; Investment Return; Market Transactions; Performance Expectations; Personal Characteristics; Financial Services Industry;

    Citation:

    Froot, Kenneth A., and J. Tjornhom Donohue. "Decomposing the Persistence of International Equity Flows." Finance Research Letters 1, no. 3 (September 2004): 154–170. (Revised from NBER Working Paper no. 9079, July 2002, Harvard Business School Working Paper no. 03-005, July 2002.) View Details
  8. Currency Returns, Intrinsic Value, and Institutional Investor Flows

    Keywords: Currencies; Exchange rates; Purchasing power parity; Real exchange rate; Forecasting and Prediction; Behavioral Finance; Investment Return; Market Transactions; Performance Expectations; Personal Characteristics; Asset Pricing; Financial Services Industry;

    Citation:

    Froot, K. A., and T. Ramadorai. "Currency Returns, Intrinsic Value, and Institutional Investor Flows." Journal of Finance 60, no. 3 (June 2005): 1535–1566. (Revised from NBER Working Paper no. 9101, August 2002 and Harvard Business School Working Paper no. 04-036, December 2003.) View Details
  9. The Persistence of Emerging Market Equity Flows

    Keywords: asset pricing; Equity Investment; Forecasting and Prediction; Behavioral Finance; Stocks; Investment Return; Market Transactions; Performance Expectations; Financial Services Industry;

    Citation:

    Froot, K. A., and J. Donohue. "The Persistence of Emerging Market Equity Flows." Emerging Markets Review 3, no. 4 (December 2002): 338–364. (Revised from NBER Working Paper no. 9241, HBS Working Paper no. 03-035, September 2002.) View Details
  10. The Pricing of Event Risks with Parameter Uncertainty

    Keywords: Catastrophe Risk; corporate finance; cost of capital; Banking and Insurance; asset pricing; Hedging; banking; Insurance; Decision choice and uncertainty; Financial Markets; Policy; Risk Management; Natural Disasters; Insurance Industry;

    Citation:

    Froot, K. A., and S. Posner. "The Pricing of Event Risks with Parameter Uncertainty." Geneva Papers on Risk and Insurance: Theory 27, no. 2 (December 2002): 153–165. (Revised from NBER Working Paper no. 8106, February 2001.) View Details
  11. The Market for Catastrophe Risk: A Clinical Examination

    Keywords: Catastrophe Risk; corporate finance; cost of capital; Banking and Insurance; asset pricing; Hedging; banking; Insurance; Decision choice and uncertainty; Financial Markets; Policy; Risk Management; Natural Disasters; Insurance Industry;

    Citation:

    Froot, K. A. "The Market for Catastrophe Risk: A Clinical Examination." Journal of Financial Economics 60, nos. 2-3 (May–June 2001): 529–571. (Revised from NBER Working Paper No. 8110, February 2001. Reprinted in The Economics of Natural Hazards, part of the International Library of Critical Writings in Economics series edited by Mark Blaug, Edward Elgar Publishing Limited, 2003.) View Details
  12. The Portfolio Flows of International Investors

    Keywords: asset pricing; Equity Investment; Forecasting and Prediction; Behavioral Finance; Stocks; Investment Return; Market Transactions; Performance Expectations; Personal Characteristics; Financial Services Industry;

    Citation:

    Froot, K. A., P. O'Connell, and M. Seasholes. "The Portfolio Flows of International Investors." Journal of Financial Economics 59, no. 2 (February 2001): 151–193. (Revised from NBER Working Paper No. 6687 and HBS Working No. Paper 99-006, July 1998. Summarized in the NBER Reporter, 2000. Reprinted in International Capital Markets, R. Stulz and A. Karolyi, eds. Edward Elgar Publishing, 2003.) View Details
  13. The Evolving Market for Catastrophe Event Risk

    Keywords: Catastrophe Risk; corporate finance; cost of capital; Banking and Insurance; asset pricing; Hedging; banking; Decision choice and uncertainty; Financial Markets; Insurance; Policy; Risk Management; Natural Disasters; Insurance Industry;

    Citation:

    Froot, K. A. "The Evolving Market for Catastrophe Event Risk." Risk Management and Insurance Review 2, no. 3 (fall 1999): 1–28. (Reprinted in Risk Management: The State of the Art, edited by S. Figlewski and R. Levich, Kluwer Academic Publishers, 2001.) View Details
  14. How Are Stock Prices Affected by the Location of Trade?

    Keywords: asset pricing; Market segmentation; International Markets; Law of one price; Behavioral Finance;

    Citation:

    Froot, K. A., and E. Dabora. "How Are Stock Prices Affected by the Location of Trade?" Journal of Financial Economics 53, no. 2 (August 1999): 189–216. (Reprinted in International Capital Markets, R. Stulz and A. Karolyi, eds. Edward Elgar Publishing, 2003. Also reprinted in Advances in Behavioral Finance, Vol. 2, edited by Richard Thaler. New Jersey: Princeton University Press; New York: Russell Sage Foundation, July 2005, 102-129.) View Details
  15. A New Approach to Capital Budgeting for Financial Institutions

    Keywords: Catastrophe Risk; corporate finance; cost of capital; Banking and Insurance; asset pricing; Hedging; banking; Insurance; Decision choice and uncertainty; Financial Markets; Insurance; Policy; Risk Management; Natural Disasters; Insurance Industry;

    Citation:

    Froot, K. A., and J. Stein. "A New Approach to Capital Budgeting for Financial Institutions." Bank of America Journal of Applied Corporate Finance 11, no. 2 (Summer 1998): 59–69. View Details
  16. Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach

    Keywords: Catastrophe Risk; corporate finance; cost of capital; Banking and Insurance; asset pricing; Hedging; banking; Decision choice and uncertainty; Financial Markets; Insurance; Policy; Risk Management; Natural Disasters; Insurance Industry;

    Citation:

    Froot, K. A., and J. Stein. "Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach." Journal of Financial Economics 47, no. 1 (January 1998): 55–82. (Winner of Journal of Financial Economics. Jensen Prize. First Place For the best paper published in the Journal of Financial Economics in the areas of corporate finance and organizations. Revised from NBER Working Paper No. 5403, January 1996 and HBS Working Paper 96-030, December 1995.) View Details
  17. New Trading Practices and Short-Run Market Efficiency

    Keywords: institutional investing; market efficiency; behavioral finance; equities; stock market; indexing; Financial Markets; Asset Pricing;

    Citation:

    Froot, Kenneth A., and André Perold. "New Trading Practices and Short-Run Market Efficiency." Journal of Futures Markets 15, no. 7 (October 1995): 731–766. (Revised from NBER Working Paper No. 3498, October 1990.) View Details
  18. Hedging Portfolios with Real Assets

    Keywords: institutional investing; market efficiency; behavioral finance; equities; stock market; indexing; Hedging; Asset allocation; commodities; commodity investing; real estate; Financial Markets; Asset Pricing;

    Citation:

    Froot, K. A. "Hedging Portfolios with Real Assets." Journal of Portfolio Management (summer 1995): 60–77. (Revised from Harvard Business School Working Paper No. 95-045, September 1993.) View Details
  19. Tests of Conditional Mean-Variance Efficiency of the U.S. Stock Market

    Keywords: asset pricing; international finance; risk aversion; risk; international investing; behavioral finance; CAPM; capital asset pricing; International Finance; Risk and Uncertainty; Asset Pricing; Financial Markets; Foreign Direct Investment; Behavioral Finance; United States;

    Citation:

    Engel, C., J. Frankel, Kenneth A. Froot, and T. Rodrigues. "Tests of Conditional Mean-Variance Efficiency of the U.S. Stock Market." Journal of Empirical Finance 2 (March 1995). (Revised from NBER Working Paper Nos. 2890, March 1989 and 4292, March 1993, "Conditional Mean-Variance Efficiency of the U.S. Stock Market," March 1993.) View Details
  20. Risk Management: Coordinating Corporate Investment and Financing Policies

    Keywords: Catastrophe Risk; corporate finance; Banking and Insurance; Hedging; banking; Insurance; Decision choice and uncertainty; Financial Markets; Insurance; Policy; Risk Management; Natural Disasters; Cost of Capital; Asset Pricing; Insurance Industry;

    Citation:

    Froot, K. A., David S. Scharfstein, and J. Stein. "Risk Management: Coordinating Corporate Investment and Financing Policies." Journal of Finance 48, no. 5 (December 1993): 1629–1658. (Revised from NBER Working Paper No. 4084, February 1993. Reprinted in RAE-Revista de Administração de Empresas, Management Journal of Fundação Getulio Vargas (FGV-EAESP), Business School for Administration in Sao Paulo, Brazil, volume no. 48, issue no. 1 (January-March 2008): 87-118. Reprinted in Insurance and Risk Management, Volume II, Corporate Risk Management, Part I: Theory on Why and How Firms Manage Risk, Chapter 3, edited by Gregory R. Niehaus, UK: Edward Elgar Publishing Ltd. (October 2008). Also in M.J. Brennan, The Theory of Corporate Finance from The International Library of Critical Writings in Financial Economics, edited by R. Roll, 1995; and in Merton Miller and Chris Culp, eds. Corporate Hedging in Theory and Practice: Lessons from Metallgesellschaft, Risk Books, 1999.) View Details
  21. Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation

    Keywords: rational expectations; Asset Pricing; Behavioral Finance;

    Citation:

    Froot, Kenneth, David S. Scharfstein, and Jeremy Stein. "Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation." Journal of Finance 47, no. 4 (September 1992): 1461–1484. (Revised from NBER Working Paper No. 3250, February 1990.) View Details
  22. Intrinsic Bubbles: The Case of Stock Prices

    Keywords: rational expectations; equities; Fundamentals; behavioral finance; Price Bubble; Stocks; Information; Asset Pricing;

    Citation:

    Froot, Kenneth A., and M. Obstfeld. "Intrinsic Bubbles: The Case of Stock Prices." American Economic Review 81, no. 5 (December 1991): 1189–1214. (Revised from NBER Working Paper No. 3091, March 1992. Reprinted in Speculation and Financial Markets, edited by M. Taylor and L. Gallagher. Cheltenham: Edward Elgar Publishing, 2001.) View Details
  23. Exchange-rate Dynamics under Stochastic Regime Shifts: A Unified Approach

    Keywords: Currencies; Exchange rates; International macroeconomics; monetary policy; Currency controls; Fixed exchange rates; Floating exchange rates; Currency bands; Currency zones; Currency areas; rational expectations; Asset Pricing;

    Citation:

    Froot, K. A., and M. Obstfeld. "Exchange-rate Dynamics under Stochastic Regime Shifts: A Unified Approach." Journal of International Economics 31 (November 1991): 203–230. (Revised from NBER Working Paper No. 2835, February 1989.) View Details
  24. Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach

    Keywords: corporate finance; Market imperfections; Foreign Direct Investment; Markets; Financial Instruments; Asset Pricing;

    Citation:

    Froot, K. A., and Jeremy Stein. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach." Quarterly Journal of Economics 106, no. 4 (November, 1991): 1191–1217. (Revised from NBER Working Paper No. 2914, March 1989.) View Details
  25. Stochastic Process Switching: Some Simple Solutions

    Keywords: Currencies; Exchange rates; International macroeconomics; monetary policy; Currency controls; Fixed exchange rates; Floating exchange rates; Currency bands; Currency zones; Currency areas; rational expectations; Asset Pricing;

    Citation:

    Froot, K. A., and M. Obstfeld. "Stochastic Process Switching: Some Simple Solutions." Econometrica 59, no. 1 (January, 1991): 241–250. (Revised from NBER Working Paper No. 2998, July 1989. Reprinted in Exchange Rates and Currency Bonds, edited by P. Krugman and M. Miller. London: CEPR, 1991.) View Details
  26. Anomalies: Foreign Exchange

    Keywords: Currencies; Exchange rates; International macroeconomics; monetary policy; Currency controls; Fixed exchange rates; Floating exchange rates; Currency bands; Currency zones; Currency areas; rational expectations; Asset Pricing;

    Citation:

    Froot, K. A., and R. Thaler. "Anomalies: Foreign Exchange." Journal of Economic Perspectives 4, no. 3 (June–August 1990): 179–192. (Reprinted in Current Issues in the International Economy: A Reader, edited by L. Goldberg and M. Klein. New York: Harper Collins, 1992; Speculation and Financial Markets, edited by M. Taylor and L. Gallagher. Cheltenham: Edward Elgar, 2001; and in Open Economy Macroeconomics, Volume II, Part I, Article 4 edited by Norman Miller. Cheltenham, U.K. and Northampton, Mass., U.S.: Edward Elgar, March 2006: 74-87.) View Details
  27. Chartists, Fundamentalists, and Trading in the Foreign Exchange Market

    Keywords: Currencies; Exchange rates,; international macroeocnomics; monetary policy; Currency controls; Fixed exchange rates; Floating exchange rates; Currency bands; Currency zones; Currency areas; rational expectations; Asset Pricing;

    Citation:

    Frankel, J., and K. A. Froot. "Chartists, Fundamentalists, and Trading in the Foreign Exchange Market." American Economic Review 80, no. 2 (May 1990): 181–185. (Reprinted in New Developments in Exchange Rate Economics, edited by L. Sarno and M. Taylor. Edward Elgar, 2001; and in Speculation and Financial Markets, edited by M. Taylor and L. Gallagher. Edward Elgar, 2001.) View Details
  28. LDC Debt: Forgiveness, Indexation, and Investment Incentives

    Keywords: Debt reduction; Chapter 7; Default; Debt restructuring; Borrowing and Debt;

    Citation:

    Froot, K. A., D. Scharfstein, and J. Stein. "LDC Debt: Forgiveness, Indexation, and Investment Incentives." Journal of Finance 44, no. 5 (December 1989): 1335–1350. (Revised from NBER Working Paper No. 2541, March 1988.) View Details
  29. On the Consistency of Short-Run and Long-Run Exchange Rate Expectations

    This paper examines whether short-term exchange rate expectations 'overreact' by comparing them with long-term expectations. We develop a set of nonlinear restrictions linking expectations at different forecast horizons. The restrictions impose consistency, a property weaker than rationality. We use exchange rate survey data to measure expectations and then test whether consistency holds. The data show that a current, positive exchange rate shock leads investors to expect a higher long-run future spot rate when iterating forward their short-term expectations than when thinking directly about the long run. In this sense short-horizon expectations may overreact to current exchange rate changes.

    Keywords: Currencies; Exchange rates; International macroeconomics; monetary policy; Currency controls; Fixed exchange rates; Floating exchange rates; Currency bands; Currency zones; Curency areas; rational expectations; Asset Pricing;

    Citation:

    Froot, K. A., and T. Ito. "On the Consistency of Short-Run and Long-Run Exchange Rate Expectations." Journal of International Money and Finance 8, no. 4 (December 1989): 487–510. (Revised from NBER Working Paper No. 2577, May 1988.) View Details
  30. Consistent Covariance Matrix Estimation with Cross-Sectional Dependence and Heteroskedasticity in Cross-Sectional Financial Data

    Keywords: econometrics; Panel estimation; Autocorrelation; Heteroskedasticity;

    Citation:

    Froot, K. A. "Consistent Covariance Matrix Estimation with Cross-Sectional Dependence and Heteroskedasticity in Cross-Sectional Financial Data." Journal of Financial and Quantitative Analysis 24, no. 3 (September, 1989): 333–355. (Revised from NBER Technical Working Paper No. 62.) View Details
  31. New Hope for the Expectations Hypothesis of the Term Structure of Interest Rates

    Keywords: rational expectations; Yield curve; Interest Rates; Asset Pricing; Behavioral Finance;

    Citation:

    Froot, K. A. "New Hope for the Expectations Hypothesis of the Term Structure of Interest Rates." Journal of Finance 44, no. 2 (June 1989): 283–305. (Revised from NBER Working Paper No. 2363, March 1990. Reprinted in Behavioral Finance, edited by H. Shefrin, part of the International Library of Critical Writings in Financial Economics, edited by R. Roll. London: Edward Elgar, 2000.) View Details
  32. Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief

    Keywords: Chapter 7; Debt reduction; Default; Sovereign debt; Debt crisis; Debt restructuring; Borrowing and Debt;

    Citation:

    Froot, K. A. "Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief." International Economic Review 30, no. 1 (February 1989): 49–70. (Revised from NBER Working Paper No. 2675, July 1988. Translated into Spanish in Estudios Economicos 4 (July 1989): 31-60.) View Details
  33. Forward Discount Bias: Is It an Exchange Risk Premium?

    Keywords: Currencies; Exchange rates; International macroeconomics; monetary policy; Currency controls; Fixed exchange rates; Floating exchange rates; Currency bands; Currency zones; Currency areas; rational expectations; Asset Pricing;

    Citation:

    Froot, K. A., and J. Frankel. "Forward Discount Bias: Is It an Exchange Risk Premium?" Quarterly Journal of Economics 104, no. 1 (February 1989): 139–161. (Revision of "Findings of Forward Discount Bias Interpreted in Light of Exchange Rate Survey Data," NBER Working Paper No. 1963 and Sloan Working Paper No. 1906-87, August 1987. Reprinted in Advances in Behavioral Finance, edited by Richard Thaler. New York: Russell Sage Foundation, 1993: 359-382 and in Speculation and Financial Markets, edited by M. Taylor and L. Gallagher. Cheltenham: Edward Elgar Publishing, 2001.) View Details
  34. Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations

    Keywords: Currencies; Exchange rates; asset pricing; International macroeconomics; monetary policy; Currency controls; Fixed exchange rates; Floating exchange rates; Currency bands; Currency zones; Currency areas; rational expectations; Data and Data Sets; Finance;

    Citation:

    Frankel, J., and K. A. Froot. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations." American Economic Review 77, no. 1 (March 1987): 133–153. (Revised from NBER Working Paper No. 1672.) View Details
  35. Understanding the U.S. Dollar in the Eighties: The Expectations of Chartists and Fundamentalists

    Keywords: Currencies; Exchange rates; asset pricing; International macroeconomics; monetary policy; Currency controls; Fixed exchange rates; Floating exchange rates; Currency bands; Currency zones; Currency areas; rational expectations; History; Performance Expectations; Economics; United States;

    Citation:

    Frankel, J., and K. A. Froot. "Understanding the U.S. Dollar in the Eighties: The Expectations of Chartists and Fundamentalists." Special Issue Economic Record (December 1986): 24–38. (Reprinted in Exchange Rate Economics, vol. I, edited by R. MacDonald and M. Taylor, International Library of Critical Writings in Economics, Edward Elgar Publishing, U.K., 1992.) View Details
  36. Short-term and Long-term Expectations of the Yen/Dollar Exchange Rate: Evidence from Survey Data

    Keywords: Currencies; Exchange rates; asset pricing; International macroeconomics; monetary policy; Currency controls; Fixed exchange rates; Floating exchange rates; Currency bands; Currency zones; Currency areas; rational expectations; Japan; United States;

    Citation:

    Frankel, J., and K. A. Froot. "Short-term and Long-term Expectations of the Yen/Dollar Exchange Rate: Evidence from Survey Data." Journal of the Japanese and International Economies 1 (September 1987): 249–274. (Revised from NBER Working Paper No. 2216, April 1987.) View Details
  37. The Dollar as an Irrational Speculative Bubble: A Tale of Fundamentalists and Chartists

    Keywords: Currencies; Exchange rates; asset pricing; International macroeconomics; monetary policy; Currency controls; Fixed exchange rates; Floating exchange rates; Currency bands; Currency zones; Currency areas; rational expectations; Currency Exchange Rate; Asset Pricing; Macroeconomics;

    Citation:

    Frankel, J., and K. A. Froot. "The Dollar as an Irrational Speculative Bubble: A Tale of Fundamentalists and Chartists." Marcus Wallenberg Papers on International Finance 1 (1986): 27–55. (Revised from NBER Working Paper No. 1854, March 1986.) View Details

Books

  1. The Global Financial System: A Functional Perspective

    Keywords: corporate finance; Imperfect markets; behavioral finance; Asset Pricing;

    Citation:

    Crane, D. B., K. A. Froot, Scott P. Mason, André Perold, R. C. Merton, Z. Bodie, E. R. Sirri, and P. Tufano. The Global Financial System: A Functional Perspective. Boston: Harvard Business School Press, 1995. View Details

Articles in Books and Non-Academic Journals

  1. Lessons from Catastrophe Reinsurance

    Of the 20 most costly catastrophes since 1970, more than half have occurred since 2001. Is this an omen of what the 21st century will be? How might we behave in this new, uncertain, and more dangerous environment? Will our actions be rational or irrational? A select group of scholars, innovators, and Nobel Laureates was asked to address challenges to rational decision making both in our day-to-day life and in the face of catastrophic threats such as climate changes, natural disasters, technological hazards, and human malevolence. At the crossroads of decision sciences, behavioral and neuro-economics, psychology, management, insurance, and finance, their contributions aim to introduce readers to the latest thinking and discoveries. The Irrational Economist challenges the conventional wisdom about how to make the right decisions in the new era we have entered. It reveals a profound revolution in thinking as understood by some of the greatest minds in our day and underscores the growing role and impact of economists and other social scientists as they guide our most important personal and societal decisions.

    Keywords: Decision Making; Insurance; Risk and Uncertainty; Natural Disasters; Behavior;

    Citation:

    Froot, Kenneth A. "Lessons from Catastrophe Reinsurance." Chap. 20 in The Irrational Economist: Making Decisions in a Dangerous World, edited by Erwann Michel-Kerjan and Paul Slovic, 171–182. New York: PublicAffairs Books, 2010. View Details
  2. Bank Capital and Risk Management: Issues for Banks and Regulators

    Banks and financial firms are in the process of evolving away from primary warehousers of risk to diversified originators and distributors of financial services. These changes are important for the way that financial firms think about their needs for economic capital and capacity to bear risk. They are also important for the way regulators evaluate capital and connect it to concepts of systemic and liquidity risk.

    This essay tries to grapple with the implications of such changes. I argue that the BIS standards place important, but perhaps excessive, emphasis on risks that emerge from financial contracts that warehouse risk and pay insufficient attention to non-warehouse business risks that emerge from broader bank activities. I also argue that the profitability of non-warehouse businesses alters economic capital requirements and necessitates changes in standard VaR calculations, and that non-warehouse businesses create important externalities in regulating systemic and liquidity risks. I believe that the Basel Committee's proposals, while providing a significant move forward, lag behind these developments in financial firm activities and may lead to considerable regulatory distortions as a result.

    Keywords: bank capital and risk management; issues for banks and regulators; Risk Management; Governance Compliance; Capital; Banks and Banking; Banking Industry;

    Citation:

    Froot, Kenneth A. "Bank Capital and Risk Management: Issues for Banks and Regulators." IFCI Geneva Research Paper, No. 8, April 2001. (International Financial Risk Institute.) View Details
  3. The Limited Financing of Catastrophe Risk: An Overview

    Keywords: Catastrophe Risk; corporate finance; cost of capital; Banking and Insurance; asset pricing; Hedging; banking; Natural Disasters; Insurance; Risk Management; Financial Markets; Policy; Insurance Industry;

    Citation:

    Froot, K. "The Limited Financing of Catastrophe Risk: An Overview." In The Financing of Catastrophe Risk, edited by Kenneth A. Froot, 1–22. Chicago: University of Chicago Press, 1999. (Revised from NBER Working Paper No. 6025, May 1997, and HBS Working Paper No. 98-023, September 1997.) View Details
  4. The Pricing of US Catastrophe Reinsurance

    Keywords: Financial Markets; Catastrophe Risk; corporate finance; cost of capital; Banking and Insurance; asset pricing; Hedging; banking; Insurance; Natural Disasters; Policy; Risk Management; Insurance Industry; United States;

    Citation:

    Froot, K., and P. O'Connell. "The Pricing of US Catastrophe Reinsurance." In The Financing of Catastrophe Risk, edited by Kenneth A. Froot, 195–232. Chicago: University of Chicago Press, 1999. (Revised from NBER Working Paper No. 6043, May 1997, and HBS Working Paper No. 98-018, September 1997.) View Details
  5. Perspectives on PPP and Long-Run Real Exchange Rates

    Keywords: Purchasing power parity; commodities; International Finance;

    Citation:

    Froot, K., and K. Rogoff. "Perspectives on PPP and Long-Run Real Exchange Rates." Chap. 32 in Handbook of International Economics, edited by G. M. Grossman and K. Rogoff, 1647–1688. Elsevier Science, 1995. (Revised from Harvard Business School Working Paper No. 95-038.) View Details
  6. Incentive Problems in Financial Contracting: Impacts on Corporate Financing, Investment, and Risk Management Policies

    Keywords: Catastrophe Risk; corporate finance; cost of capital; Banking and Insurance; asset pricing; Hedging; banking; Decision choice and uncertainty; Financial Markets; Insurance; Policy; Risk Management; Natural Disasters; Insurance Industry;

    Citation:

    Froot, K. "Incentive Problems in Financial Contracting: Impacts on Corporate Financing, Investment, and Risk Management Policies." Chap. 7 in The Global Financial System: A Functional Perspective, by D. B. Crane, K. A. Froot, Scott P. Mason, André Perold, R. C. Merton, Z. Bodie, E. R. Sirri, and P. Tufano, 225–261. Boston: Harvard Business School Press, 1995. (Revised from Harvard Business School Working Paper No. 95-020.) View Details
  7. Interest Allocation Rules, Financing Patterns, and the Operations of US Multinationals

    Keywords: Corporation taxation; Interest deductibility; cost of capital; corporate finance; Cost of Capital; Taxation; Financing and Loans; Corporate Finance;

    Citation:

    Froot, K. "Interest Allocation Rules, Financing Patterns, and the Operations of US Multinationals." In The Effects of Taxation on Multinational Corporations, edited by M. Feldstein, J. Hines, and G. Hubbard, 277–307. University of Chicago Press, 1995. (Also featured in The NBER Digest, November 1994. Revised from NBER Working Paper No. 4924.) View Details
  8. The Tax Treatment of Interest and the Operations of U.S. Multinationals

    Keywords: Corporation taxation; Interest deductibility; cost of capital; corporate finance; Cost of Capital; Taxation; Financing and Loans; Corporate Finance;

    Citation:

    Froot, Kenneth A. "The Tax Treatment of Interest and the Operations of U.S. Multinationals." In Taxing Multinational Corporations, edited by M. Feldstein, J. Hines, and G. Hubbard, 81–93. University of Chicago Press, 1995. View Details
  9. Securities Transaction Taxes: What about International Experiences Migrating Markets?

    Keywords: Corporation taxation; Interest deductibility; cost of capital; corporate finance; Cost of Capital; Taxation; Financing and Loans; Interest Rates; Corporate Finance;

    Citation:

    Froot, K., and J. Campbell. "Securities Transaction Taxes: What about International Experiences Migrating Markets?" In Securities Transaction Taxes: False Hopes and Unintended Consequences, edited by Suzanne Hammond. Chicago: Irwin Professional Publishing, 1994. (Reprinted in Inversión y Finanzas, 1996.) View Details
  10. A Framework for Risk Management

    Keywords: Catastrophe Risk; corporate finance; cost of capital; Banking and Insurance; asset pricing; Hedging; banking; Insurance; Decision choice and uncertainty; Financial Markets; Insurance; Policy; Risk Management; Natural Disasters; Insurance Industry;

    Citation:

    Froot, K., David S. Scharfstein, and J. Stein. "A Framework for Risk Management." Harvard Business Review 72, no. 6 (November–December 1994): 59–71. (Revised from "Developing a Risk Management Strategy," Harvard Business School Working Paper No. 95-021. Reprinted in Bank of America Journal of Applied Corporate Finance 7, no. 3 (fall 1994): 22-32; Marsh & McLennan Companies' Viewpoint 24 (spring 1995): 21-37; and in Corporate Risk: Strategies and Management, edited by Greg Brown and Don Chew, London: Risk Books, December 1999.) View Details
  11. International Experiences with Securities Transaction Taxes

    Keywords: Corporation taxation; Interest deductibility; cost of capital; corporate finance; Accounting; Borrowing and Debt; Financing and Loans; Interest Rates;

    Citation:

    Froot, K. A., and J. Campbell. "International Experiences with Securities Transaction Taxes." In The Internationalization of Equity Markets, edited by J. Frankel, 277–308. University of Chicago Press, 1994. (Revised from NBER Working Paper No. 4587, December 1993; also featured in The NBER Digest, May 1994.) View Details
  12. Foreign Direct Investment in Eastern Europe: Some Economic Considerations

    Keywords: foreign direct investment; markets; asset pricing; corporate finance; Market imperfections; Foreign Direct Investment; Europe;

    Citation:

    Froot, K. "Foreign Direct Investment in Eastern Europe: Some Economic Considerations." In The Transition in Eastern Europe (Restructuring). Vol. 2, edited by O. Blanchard, K. Froot, and J. Sachs, 293–318. Chicago: University of Chicago Press, 1994. View Details
  13. Introduction and Overview: The Transition Economies of Eastern Europe

    Keywords: International trade; international finance; International Finance; Trade;

    Citation:

    Froot, K. A., O. Blanchard, and J. Sachs. "Introduction and Overview: The Transition Economies of Eastern Europe." In The Transition in Eastern Europe (Restructuring). Vol. 2, edited by O. Blanchard, K. Froot, and J. Sachs, 1–18. Chicago: University of Chicago Press, 1994. View Details
  14. Trading Blocs and the Incentive to Protect: Implications for Japan and East Asia

    Keywords: International trade; international finance; International Finance; Trade;

    Citation:

    Froot, K. A., and D. B. Yoffie. "Trading Blocs and the Incentive to Protect: Implications for Japan and East Asia." In Regionalism and Rivalry: Japan and the United States in Pacific Asia, edited by J. Frankel and M. Kahler, 125–156. Chicago, IL: University of Chicago Press, 1993. View Details
  15. Strategic Trade Policies in a Tripolar World

    Keywords: International trade; international finance; International Finance; Trade;

    Citation:

    Froot, Kenneth A., and D. B. Yoffie. "Strategic Trade Policies in a Tripolar World." International Spectator 26, no. 3 (July–September 1991): 3–28. (Reprinted in The Political Economy of International Cooperation, NIRA Research Output, Vol. 5, No. 1, 1992.) View Details
  16. Shareholder Trading Practices and Corporate Investment Horizons

    Keywords: institutional investing; market efficiency; behavioral finance; equities; stock market; indexing; Financial Markets; Asset Pricing;

    Citation:

    Froot, Kenneth A., André Perold, and J. Stein. "Shareholder Trading Practices and Corporate Investment Horizons." Continental Bank Journal of Applied Corporate Finance 5, no. 2 (summer 1992): 42–58. View Details
  17. The EMS, the EMU and the Transition to a Common Currency

    Keywords: Currencies; Exchange rates; asset pricing; International macroeconomics; monetary policy; Currency controls; Fixed exchange rates; Floating exchange rates; Currency bands; Currency zones; Currency areas; rational expectations; International Finance; Currency Exchange Rate; Asset Pricing; Policy;

    Citation:

    Froot, K. A., and K. Rogoff. "The EMS, the EMU and the Transition to a Common Currency." In Macroeconomics Annual 1991, edited by O. Blanchard and S. Fischer, 269–327. Cambridge: MIT Press, 1992. (Revised from NBER Working Paper No. 3684, January 1992.) View Details
  18. Exchange Rate Forecasting Techniques, Survey Data, and Implications for the Foreign Exchange Market

    Keywords: Currencies; Exchange rates; asset pricing; International macroeconomics; monetary policy; Currency controls; Fixed exchange rates; Floating exchange rates; Currency bands; Currency zones; Currency areas; rational expectations; International Finance; Currency Exchange Rate; Asset Pricing; Forecasting and Prediction; Policy;

    Citation:

    Frankel, J., and K. A. Froot. "Exchange Rate Forecasting Techniques, Survey Data, and Implications for the Foreign Exchange Market." In International Business Reader, edited by D. Duta. London: Oxford University Press, 1992. (Revised from IMF Working Paper No. 90/43 and NBER Working Paper No. 3470, October 1990.) View Details
  19. Japanese Foreign Direct Investment

    Keywords: financial instruments; foreign direct investment; markets; asset pricing; corporate finance; Market imperfections; Financial Instruments; Markets; Asset Pricing; Foreign Direct Investment; Corporate Finance;

    Citation:

    Froot, K. A. "Japanese Foreign Direct Investment." In U.S.-Japan Economic Forum. Vol. 1, edited by M. Feldstein and Y. Kosai. National Bureau of Economic Research, 1991. (Revised from NBER Working Paper No. 3737, June 1991.) View Details
  20. New Trading Practices and the Short-run Predictability of the S&P 500

    Keywords: Financial Markets; asset pricing; institutional investing; market efficiency; behavioral finance; equities; stock market; indexing; Asset Pricing; Financial Markets; Investment; Behavioral Finance;

    Citation:

    Perold, André, Kenneth A. Froot, and James F. Gammill Jr. "New Trading Practices and the Short-run Predictability of the S&P 500." Market Volatility and Investor Confidence: Report to the Board of Directors of the New York Stock Exchange, Inc. (June 7, 1990): G1: 1–27. View Details
  21. Multinational Corporations, Exchange Rates, and Direct Investment

    Keywords: corporate finance; Market imperfections; Financial Instruments; Foreign Direct Investment; Markets; Asset Pricing;

    Citation:

    Froot, K. A. "Multinational Corporations, Exchange Rates, and Direct Investment." In International Policy Coordination and Exchange Rate Fluctuations, edited by W. Branson, J. Frankel, and M. Goldstein, 307–346. Chicago: University of Chicago Press, 1990. View Details
  22. Chartists, Fundamentalists, and the Demand for Dollars

    Keywords: Currencies; Exchange rates; asset pricing; International macroeconomics; monetary policy; Currency controls; Fixed exchange rates; Floating exchange rates; Currency bands; Currency zones; Currency areas; rational expectations; Currency Exchange Rate; Asset Pricing; Macroeconomics;

    Citation:

    Frankel, J., and K. A. Froot. "Chartists, Fundamentalists, and the Demand for Dollars." In Private Behaviour and Government Policy in Interdependent Economies, edited by Anthony Courakis and Mark Taylor, 73–128. Oxford: Clarendon Press, 1990. (Reprinted in Greek Economic Review 10 (June 1988): 49-102; and translated in Cuadernos Economicos de ICE, No. 38 (1988): 195-242.) View Details
  23. Adjustment of the U.S. and Japanese External Imbalances

    Keywords: International trade; international finance; International Finance; Trade;

    Citation:

    Froot, K. A. "Adjustment of the U.S. and Japanese External Imbalances." In Papers and Proceedings of the Fourth Economic Planning Agency International Symposium, edited by M. Yoshitomi, 287–304. Economic Planning Agency (Japan), 1988. View Details
  24. Explaining the Demand for Dollars: International Rates of Return, and the Expectations of Chartists and Fundamentalists

    Keywords: Currencies; Exchange rates; asset pricing; International macroeconomics; monetary policy; Currency controls; Fixed exchange rates; Floating exchange rates; Currency bands; Currency zones; Currency areas; rational expectations; Currency Exchange Rate; Asset Pricing; Macroeconomics;

    Citation:

    Frankel, J., and K. A. Froot. "Explaining the Demand for Dollars: International Rates of Return, and the Expectations of Chartists and Fundamentalists." In Macroeconomics, Agriculture, and Exchange Rates, edited by R. Chambers and P. Paarlberg, 25–88. Boulder, CO: Westview Press, 1988. View Details

Book Reviews and Miscellaneous Publications

  1. Economic Crises: Necessary for Trade Liberalization and Fiscal Reform?

    Keywords: Business Cycles; Financial Crisis; Trade; Government and Politics; Governing Rules, Regulations, and Reforms;

    Citation:

    Froot, K. A. Comment on "Economic Crises: Necessary for Trade Liberalization and Fiscal Reform?" Stabilization, Economic Reform and Growth, edited by R. Dornbusch and S. Edwards, 73–75. University of Chicago Press, 1994. View Details
  2. Roundtable on U.S. Risk Capital and Innovation (With a Look at Eastern Europe)

    Keywords: Risk and Uncertainty; Capital; Innovation and Invention; United States; Europe;

    Citation:

    Baty, G., W. Bygrave, D. Chew, P. Finegan, K. A. Froot, T. Gray, J. Kensiger, G. W. Loveman, S. Magee, and J. Martin. "Roundtable on U.S. Risk Capital and Innovation (With a Look at Eastern Europe)." Continental Bank Journal of Applied Corporate Finance 4, no. 4 (winter 1992): 48–78. View Details
  3. Comment on 'The Impact of the Tax Reform Act of 1986 on Foreign Direct Investment to and from the United States'

    Keywords: Taxation; Laws and Statutes; Foreign Direct Investment; United States;

    Citation:

    Froot, K. A. "Comment on 'The Impact of the Tax Reform Act of 1986 on Foreign Direct Investment to and from the United States'." In Do Taxes Matter? The Impact of the Tax Reform Act of 1986, edited by J. Slemrod, 198–200. Cambridge, MA: MIT Press, 1990. View Details
  4. Labor Market Distortions as a Case for Export Subsidies: Comment on Katz and Summers

    Keywords: Trade; Employment; Policy; Government and Politics;

    Citation:

    Froot, K. A. "Labor Market Distortions as a Case for Export Subsidies: Comment on Katz and Summers." In Trade Policies for International Competitiveness, edited by R. Feenstra, 117–120. Chicago: University of Chicago Press, 1989. View Details

Unpublished Papers

  1. The Risk Tolerance of International Investors

    Keywords: asset pricing; international finance; risk aversion; risk; international investing; Risk and Uncertainty; International Finance; Asset Pricing; Investment;

    Citation:

    Froot, Kenneth A., and Paul G. J. O'Connell. "The Risk Tolerance of International Investors." Harvard Business School Working Paper, No. 04-034, January 2004. (Also NBER Working Paper No. 10157, December 2003.) View Details
  2. Currency Hedging Over Long Horizons

    This paper reexamines the widely-held wisdom that the currency exposure of international investments should be entirely hedged. It finds that the previously documented ability of hedges to reduce portfolio return variance holds at short horizons, but not at long horizons. At horizons of several years, complete hedging not only does not lower return variance, it actually increases the return variance of many portfolios. Hedge ratios chosen to minimize long-run return variance are not only low, they also have no perceptible impact on return variance. The paper reports and explores these results, their apparent causes, and investigates their implications for hedging practice.

    Keywords: currency; Hedging; asset pricing; transaction costs; Exchange rates; international finance; International Markets; Real exchange rate; Purchasing power parity; International Finance; Currency Exchange Rate; Asset Pricing; Investment; Globalized Markets and Industries;

    Citation:

    Froot, K. A. "Currency Hedging Over Long Horizons." NBER Working Paper Series, No. 4355, May 1993. (Featured in the NBER Digest, October 1993. Harvard University, April 1993.) View Details
  3. Tests of Excess Forecast Volatility in the Foreign Exchange and Stock Markets

    Simple regression tests that have power against the alternatives that asset prices and expected future asset returns are excessively volatile are developed and performed for the foreign exchange and stock markets. These tests have a number of advantages over alternative, variance bounds techniques. We find evidence that both exchange rates and stock prices are excessively volatile and that expected returns on foreign exchange and stocks move too much. We also investigate whether these findings can be attributed to time-varying risk premia, but in our tests the data provide little support for such an alternative hypothesis.

    Keywords: asset pricing; international finance; risk aversion; risk; international investing; behavioral finance; International Finance; Risk and Uncertainty; Asset Pricing; Financial Markets; Investment; Behavioral Finance; Volatility;

    Citation:

    Froot, K. A. "Tests of Excess Forecast Volatility in the Foreign Exchange and Stock Markets." NBER Working Paper Series, No. 2362, August 1987. View Details

Cases and Teaching Materials

  1. Innovating into Active ETFs: Factor Funds Capital Management LLC

    Kishore Karunakaran, President and COO of FFCM, faces a variety of challenges in launching an innovative investment management business in the rapidly evolving ETF space.

    Keywords: investment management; institutional investments; entrepreneurial finance; Financial Management; Innovation Strategy; Corporate Entrepreneurship; Capital Markets; Investment Funds; Financial Strategy; Management Teams; Financial Services Industry; Boston;

    Citation:

    Froot, Kenneth A., Lauren Cohen, and Scott Waggoner. "Innovating into Active ETFs: Factor Funds Capital Management LLC." Harvard Business School Case 211-031, November 2010. (Revised May 2012.) View Details
  2. BlackRock Solutions

    The BlackRock Solutions case examines the different functions and economics of a global asset manager's value chain, with particular emphasis on the "money management" and the "investment systems platform" businesses. Students analyze why BlackRock decided to unbundle its Aladdin investment platform and if the firm should consider expanding the platform in the future. Students also explore the resulting "dual-mission" challenges of servicing both internal and external Aladdin clients during a period of rapid growth within BlackRock and significant change in the global financial landscape.

    Keywords: investment management; strategic vision; organizational behavior; economies of scale and scope; unbundling of services; Strategic Planning; Risk Management; Financial Management; Asset Management; Competitive Advantage; Value; Corporate Strategy; Organizational Culture; Investment; Financial Strategy;

    Citation:

    Froot, Kenneth A., and Scott Waggoner. "BlackRock Solutions." Harvard Business School Case 211-082, April 2011. (Revised September 2011.) View Details
  3. BlackRock Solutions

    The BlackRock Solutions case examines the different functions and economics of a global asset manager's value chain, with particular emphasis on the "money management" and the "investment systems platform" businesses. Students analyze why BlackRock decided to unbundle its Aladdin investment platform and if the firm should consider expanding the platform in the future. Students also explore the resulting "dual-mission" challenges of servicing both internal and external Aladdin clients during a period of rapid growth within BlackRock and significant change in the global financial landscape.

    Keywords: investment management; strategic vision; organizational behavior; economies of scale and scope; unbundling of services; Strategic Planning; Risk Management; Financial Management; Asset Management; Competitive Advantage; Value; Corporate Strategy; Organizational Culture; Investment; Financial Strategy;

    Citation:

    Froot, Kenneth A., and Scott Waggoner. "BlackRock Solutions." Harvard Business School Case 211-082, April 2011. (Revised September 2011.) View Details
  4. BlackRock Money Market Management in September 2008 (A)

    This case highlights the issues around money market mutual funds in the financial crisis of 2008.

    Keywords: BlackRock; mutual funds; money market; investment management; bank runs; 2008 financial crisis; government intervention in the markets; GRG; Financial Management; Investment Funds; Crisis Management; Government and Politics; Financial Crisis; Financial Services Industry;

    Citation:

    Froot, Kenneth A., and David Lane. "BlackRock Money Market Management in September 2008 (A)." Harvard Business School Case 209-101, June 2009. (Revised May 2010.) View Details
  5. BlackRock Money Market Management in September 2008 (A)

    This case highlights the issues around money market mutual funds in the financial crisis of 2008.

    Keywords: BlackRock; mutual funds; money market; investment management; bank runs; 2008 financial crisis; government intervention in the markets; GRG; Financial Management; Investment Funds; Crisis Management; Government and Politics; Financial Crisis; Financial Services Industry;

    Citation:

    Froot, Kenneth A., and David Lane. "BlackRock Money Market Management in September 2008 (A)." Harvard Business School Case 209-101, June 2009. (Revised May 2010.) View Details
  6. BlackRock Money Market Management in September 2008 (B)

    This case highlights the issues surrounding money market mutual funds in the financial crisis of 2008.

    Keywords: BlackRock; mutual funds; money market; investment management; bank runs; 2008 financial crisis; government intervention in the markets; GRG; Financial Management; Investment Funds; Government and Politics; Financial Crisis; Financial Services Industry;

    Citation:

    Froot, Kenneth A., and David Lane. "BlackRock Money Market Management in September 2008 (B)." Harvard Business School Supplement 209-139, June 2009. (Revised May 2010.) View Details
  7. BlackRock Money Market Management in September 2008 (B)

    This case highlights the issues surrounding money market mutual funds in the financial crisis of 2008.

    Keywords: BlackRock; mutual funds; money market; investment management; bank runs; 2008 financial crisis; government intervention in the markets; GRG; Financial Management; Investment Funds; Government and Politics; Financial Crisis; Financial Services Industry;

    Citation:

    Froot, Kenneth A., and David Lane. "BlackRock Money Market Management in September 2008 (B)." Harvard Business School Supplement 209-139, June 2009. (Revised May 2010.) View Details
  8. Measuring Investment Performance

    Examines various approaches to measuring investment performance. The approaches include the use of risk exposure and the Sharpe and Information Ratios. Applies the approaches to a variety of mutual funds to demonstrate the effect of using different metrics to measure fund performance.

    Keywords: Financial Management; Investment; Management Analysis, Tools, and Techniques; Measurement and Metrics; Performance; Risk and Uncertainty;

    Citation:

    Perold, Andre F., and Kenneth A. Froot. "Measuring Investment Performance." Harvard Business School Background Note 208-110, January 2008. View Details
  9. Nephila: Innovation in Catastrophe Risk Insurance

    At the cross-section of capital markets and the catastrophe insurance space stands the hedge fund Nephila. Nephila must decide how best to take advantage of the newly presented market opportunities post hurricanes Katrina, Wilma, and Rita. Nephila has a plethora of options as it brings capital markets understanding to the insurance space. Nephila can easily trade in and out of insurance products and is not subject to regulatory restrictions. Yet, Nephila only capitalizes 1% of the entire catastrophe reinsurance market. What is the best way to grow?

    Keywords: hedge fund; investment management; uncertainty; Risk and Uncertainty; Natural Disasters; Insurance; Capital Markets; Investment Funds; Financial Services Industry; Insurance Industry; Bermuda;

    Citation:

    Froot, Kenneth A., and Michael Heinrich. "Nephila: Innovation in Catastrophe Risk Insurance." Harvard Business School Case 206-130, June 2006. (Revised April 2007.) View Details
  10. Nephila: Innovation in Catastrophe Risk Insurance

    At the cross-section of capital markets and the catastrophe insurance space stands the hedge fund Nephila. Nephila must decide how best to take advantage of the newly presented market opportunities post hurricanes Katrina, Wilma, and Rita. Nephila has a plethora of options as it brings capital markets understanding to the insurance space. Nephila can easily trade in and out of insurance products and is not subject to regulatory restrictions. Yet, Nephila only capitalizes 1% of the entire catastrophe reinsurance market. What is the best way to grow?

    Keywords: hedge fund; investment management; uncertainty; Risk and Uncertainty; Natural Disasters; Insurance; Capital Markets; Investment Funds; Financial Services Industry; Insurance Industry; Bermuda;

    Citation:

    Froot, Kenneth A., and Michael Heinrich. "Nephila: Innovation in Catastrophe Risk Insurance." Harvard Business School Case 206-130, June 2006. (Revised April 2007.) View Details
  11. Pacific Salmon Company, Inc. (CW)

    RRR, a $1 billion private equity fund, is trying to decide how much to bid for Pacific Salmon Inc. and how to finance the acquisition.

    Keywords: food; bids; Private Equity; Financing and Loans; Bids and Bidding; Acquisition; Food and Beverage Industry;

    Citation:

    El-Hage, Nabil N., and Kenneth A. Froot. "Pacific Salmon Company, Inc. (CW)." Harvard Business School Spreadsheet Supplement 205-711, March 2005. (Revised March 2007.) View Details
  12. Pacific Salmon Company, Inc.

    RRR, a $1 billion private equity fund, is trying to decide how much to bid for Pacific Salmon Inc. and how to finance the acquisition.

    Keywords: food; bids; Private Equity; Decision Making; Financing and Loans; Bids and Bidding; Acquisition; Corporate Finance; Financial Services Industry;

    Citation:

    El-Hage, Nabil N., Kenneth A. Froot, and Christopher Edward James Payton. "Pacific Salmon Company, Inc." Harvard Business School Case 205-031, December 2004. (Revised May 2006.) View Details
  13. UAL, 2004: Pulling Out of Bankruptcy

    UAL is a large air transportation company with roots that go back to the 1920s. As a legacy carrier, going back to before the 1978 deregulation of air transportation markets, United Airlines is burdened with cost structures that make it difficult to compete with newer competitors. In addition, UAL has the burden of $7.6 billion in unfunded pension obligations and $2 billion in unfunded retiree health obligations. In June 2004, UAL is still operating under Chapter 11 bankruptcy protection, which began December 2002. It has needed extensions of the exclusivity period from the bankruptcy court. UAL's plan of reorganization is predicated on receiving $1.8 billion in loan guarantees from the Air Transport Stabilization Board (ATSB). But its request for loan guarantees from the ATSB was recently rejected. The company must decide what to do next and how to emerge from bankruptcy.

    Keywords: bankruptcy; compensation; costs; loans; reorganization; Cost; Restructuring; Financing and Loans; Insolvency and Bankruptcy; Compensation and Benefits; Air Transportation Industry; United States;

    Citation:

    Bergstresser, Daniel Baird, Kenneth A. Froot, and Darren Robert Smart. "UAL, 2004: Pulling Out of Bankruptcy." Harvard Business School Case 205-090, February 2005. (Revised June 2006.) View Details
  14. UAL, 2004: Pulling Out of Bankruptcy

    UAL is a large air transportation company with roots that go back to the 1920s. As a legacy carrier, going back to before the 1978 deregulation of air transportation markets, United Airlines is burdened with cost structures that make it difficult to compete with newer competitors. In addition, UAL has the burden of $7.6 billion in unfunded pension obligations and $2 billion in unfunded retiree health obligations. In June 2004, UAL is still operating under Chapter 11 bankruptcy protection, which began December 2002. It has needed extensions of the exclusivity period from the bankruptcy court. UAL's plan of reorganization is predicated on receiving $1.8 billion in loan guarantees from the Air Transport Stabilization Board (ATSB). But its request for loan guarantees from the ATSB was recently rejected. The company must decide what to do next and how to emerge from bankruptcy.

    Keywords: bankruptcy; compensation; costs; loans; reorganization; Cost; Restructuring; Financing and Loans; Insolvency and Bankruptcy; Compensation and Benefits; Air Transportation Industry; United States;

    Citation:

    Bergstresser, Daniel Baird, Kenneth A. Froot, and Darren Robert Smart. "UAL, 2004: Pulling Out of Bankruptcy." Harvard Business School Case 205-090, February 2005. (Revised June 2006.) View Details
  15. Geeli

    A well-performing Chinese manufacturer faces major impediments raising funding to grow. Highlights various imperfections that shape the financing decision.

    Keywords: Capital costs; International Finance; Diversification; Financial Instruments; Cost of Capital; Global Strategy; Financial Strategy; Manufacturing Industry; Hong Kong;

    Citation:

    Jin, Li, Kenneth A. Froot, and Si Ping May Yu. "Geeli." Harvard Business School Case 206-105, March 2006. (Revised April 2006.) View Details
  16. Global Equity Markets: The Case of Royal Dutch and Shell

    Royal Dutch and Shell common stocks are securities with linked cash flow, so that the ratio of their stock prices should be fixed. In fact, the ratio is highly variable, moving with the markets where the securities are intensively traded. Royal Dutch trades more actively in the Netherlands and U.S. markets, whereas Shell trades more actively in the United States. The result is that the Royal Dutch/Shell relative price moves positively with the Netherlands and U.S. markets and negatively with the U.K. market. The ability to arbitrage these disparities and their causes are major case focal points.

    Keywords: international equity markets; international cost of capital; cross-border valuation; International Finance; Equity; Cost of Capital; Valuation; Cash Flow;

    Citation:

    Froot, Kenneth A., and Andre F. Perold. "Global Equity Markets: The Case of Royal Dutch and Shell." Harvard Business School Case 296-077, March 1996. (Revised April 2006.) View Details
  17. Global Equity Markets: The Case of Royal Dutch and Shell TN

    Teaching Note for (9-296-077).

    Keywords: Financial Services Industry; United States; Netherlands; United Kingdom;

    Citation:

    Froot, Kenneth A., and Maciej Cuchra. "Global Equity Markets: The Case of Royal Dutch and Shell TN." Harvard Business School Teaching Note 201-093, February 2001. (Revised April 2006.) View Details
  18. Geeli (CW)

    A well-performing Chinese manufacturer faces major impediments raising funding to grow. Highlights various imperfections that shape the financing decision.

    Keywords: Capital costs; Diversification; Cost of Capital; Financing and Loans; Financial Strategy; Growth and Development Strategy; Manufacturing Industry; China;

    Citation:

    Froot, Kenneth A., and Li Jin. "Geeli (CW)." Harvard Business School Spreadsheet Supplement 206-710, March 2006. View Details
  19. UAL 2004: Pulling Out of Bankruptcy (CW)

    UAL is a large air transportation company with roots that go back to the 1920s. As a legacy carrier, going back to before the 1978 deregulation of air transportation markets, United Airlines is burdened with cost structures that make it difficult to compete with newer competitors. In addition, UAL has the burden of $7.6 billion in unfunded pension obligations and $2 billion in unfunded retiree health obligations. In June 2004, UAL is still operating under Chapter 11 bankruptcy protection, which began December 2002. It has needed extensions of the exclusivity period from the bankruptcy court. UAL's plan of reorganization is predicated on receiving $1.8 billion in loan guarantees from the Air Transport Stabilization Board (ATSB). But its request for loan guarantees from the ATSB was recently rejected. The company must decide what to do next and how to emerge from bankruptcy.

    Keywords: bankruptcy; compensation; costs; loans; reorganization; Restructuring; Financing and Loans; Insolvency and Bankruptcy; Compensation and Benefits; Air Transportation Industry; United States;

    Citation:

    Bergstresser, Daniel Baird, Kenneth A. Froot, and Darren Robert Smart. "UAL 2004: Pulling Out of Bankruptcy (CW)." Harvard Business School Spreadsheet Supplement 205-709, February 2005. (Revised November 2012.) View Details
  20. PepsiCo Bottling in Mexico

    This case describes Pepsico's program to restructure its Mexican bottling network. It wants to work with existing bottlers and find an organizational arrangement that will allow the bottlers to grow and change with the Mexican soft drink industry.

    Keywords: joint ventures; bottling; Mergers and Acquisitions; Joint Ventures; Multinational Firms and Management; International Finance; Valuation; Programs; Organizational Design; Food and Beverage Industry; Mexico;

    Citation:

    Froot, Kenneth A. "PepsiCo Bottling in Mexico." Harvard Business School Case 293-137, May 1993. (Revised June 2004.) View Details
  21. Innovation at the Treasury: Treasury Inflation-Protection Securities (B)

    In 1997, the U.S. Treasury was deciding whether to proceed with a proposal to issue inflation-indexed bonds. This case explores the challenges facing innovation in the financial markets as the Treasury tries to determine whether to introduce Treasury Inflation-Protection Securities.

    Keywords: inflation; innovation; Federal government; securities; Financial Instruments; Inflation and Deflation; Financial Markets; Government and Politics; Financial Institutions; Innovation and Invention; United States;

    Citation:

    Froot, Kenneth A., Peter A. Hecht, and Christopher Edward James Payton. "Innovation at the Treasury: Treasury Inflation-Protection Securities (B)." Harvard Business School Supplement 204-113, January 2004. (Revised August 2004.) View Details
  22. Innovation at the Treasury: Treasury Inflation-Protection Securities (A)

    In 1997, the U.S. Treasury was deciding whether to proceed with a proposal to issue inflation-indexed bonds. This case explores the challenges facing innovation in the financial markets as the Treasury tries to determine whether to introduce Treasury Inflation-Protection Securities.

    Keywords: inflation; innovation; Federal government; securities; Debt Securities; Risk Management; Bonds; Investment Portfolio; Capital Markets; Inflation and Deflation; Government and Politics; Innovation and Invention; United States;

    Citation:

    Froot, Kenneth A., Peter A. Hecht, and Christopher Edward James Payton. "Innovation at the Treasury: Treasury Inflation-Protection Securities (A)." Harvard Business School Case 204-112, January 2004. (Revised June 2004.) View Details
  23. Innovation at the Treasury: Treasury Inflation-Protection Securities (TN) (A) and (B)

    Teaching Note to (9-204-112) and (9-204-113).

    Keywords: Public Administration Industry; United States;

    Citation:

    Froot, Kenneth A., Peter A. Hecht, and Christopher E.J. Payton. "Innovation at the Treasury: Treasury Inflation-Protection Securities (TN) (A) and (B)." Harvard Business School Teaching Note 205-015, August 2004. View Details
  24. Commercial Financial Services, Inc.: Securitization of Charged-off Credit Card Receivables

    Commercial Financial Services (CFS) is a company that buys charged-off credit card receivables, securitizes them, and then attempts to collect on the receivables. The case deals with how the firm makes money and the limits of securitization as an efficient financing strategy.

    Keywords: financing; asset-back finance; financial policy; securitization; Credit; Financial Strategy; Business Strategy; Policy; Financial Services Industry;

    Citation:

    Froot, Kenneth A., and Ivan G. Farman. "Commercial Financial Services, Inc.: Securitization of Charged-off Credit Card Receivables." Harvard Business School Case 299-023, October 1998. (Revised May 1999.) View Details
  25. Collateralized Loan Obligations and the Bistro Trust

    This case examines a large bank trying to protect itself from the risks and capital requirement created by its loan portfolio. Considers a variety of ways available to the firm to offload the risks.

    Keywords: banking; loan evaluation; financing strategy; Credit; Risk Management; Banks and Banking; Financing and Loans; Financial Strategy; Banking Industry;

    Citation:

    Froot, Kenneth A., and Ivan G. Farman. "Collateralized Loan Obligations and the Bistro Trust." Harvard Business School Case 299-016, November 1998. (Revised May 1999.) View Details
  26. American International Group, Inc.

    American International Group, Inc. (AIG), one of the world's largest and most innovative insurers and financial intermediaries, is considering new strategies in an era of new competition and Internet distribution.

    Keywords: Insurance; Competitive Strategy; Internet; Distribution; Innovation and Invention;

    Citation:

    Froot, Kenneth A., and Heidi Cruz. "American International Group, Inc." Harvard Business School Case 200-026, December 1999. View Details
  27. 1994-95 Mexican Peso Crisis, The

    Explores the peso crisis of 1994-95 and why it occurred. Students must examine Mexico's policies, the capital market's reactions, and the implications of devaluation for future capital flows and growth.

    Keywords: Exchange rates; International capital markets; Devaluation; Currency Exchange Rate; Financial Markets; International Finance; Capital; Mexico;

    Citation:

    Froot, Kenneth A., and Matthew McBrady. "1994-95 Mexican Peso Crisis, The." Harvard Business School Case 296-056, January 1996. (Revised December 1999.) View Details
  28. Mid Ocean Limited: Trading Catastrophe Index Options

    An insurance industry executive must evaluate the potential of a set of newly-offered catastrophe insurance derivatives. The background addresses the roles of traditional reinsurance and securitization efforts in providing risk transfer and risk financing in the "cat" insurance field. The benefits and difficulties involved in commoditizing a new asset class are explored as well.

    Keywords: commodity market; derivatives; Insurance; Capital Markets; Natural Disasters; Risk Management; Financial Management; Financial Strategy; Performance Evaluation; Insurance Industry; Bermuda;

    Citation:

    Froot, Kenneth A., and Markus Mullarkey. "Mid Ocean Limited: Trading Catastrophe Index Options." Harvard Business School Case 298-073, December 1997. (Revised March 1998.) View Details
  29. Mid Ocean Limited: Trading Catastrophe Index Options

    An insurance industry executive must evaluate the potential of a set of newly-offered catastrophe insurance derivatives. The background addresses the roles of traditional reinsurance and securitization efforts in providing risk transfer and risk financing in the "cat" insurance field. The benefits and difficulties involved in commoditizing a new asset class are explored as well.

    Keywords: commodity market; derivatives; Insurance; Capital Markets; Natural Disasters; Risk Management; Financial Management; Financial Strategy; Performance Evaluation; Insurance Industry; Bermuda;

    Citation:

    Froot, Kenneth A., and Markus Mullarkey. "Mid Ocean Limited: Trading Catastrophe Index Options." Harvard Business School Case 298-073, December 1997. (Revised March 1998.) View Details
  30. USAA: Catastrophe Risk Financing

    Describes the first major risk financing using catastrophe bonds. Provides a basis for discussing the securitization of insurance risks.

    Keywords: Financial Management; Insurance; Capital Markets; Natural Disasters; Risk Management; Bonds; Insurance Industry; Financial Services Industry; United States;

    Citation:

    Froot, Kenneth A., and Mark Seasholes. "USAA: Catastrophe Risk Financing." Harvard Business School Case 298-007, July 1997. (Revised September 1997.) View Details
  31. USAA: Catastrophe Risk Financing

    Describes the first major risk financing using catastrophe bonds. Provides a basis for discussing the securitization of insurance risks.

    Keywords: Financial Management; Insurance; Capital Markets; Natural Disasters; Risk Management; Bonds; Insurance Industry; Financial Services Industry; United States;

    Citation:

    Froot, Kenneth A., and Mark Seasholes. "USAA: Catastrophe Risk Financing." Harvard Business School Case 298-007, July 1997. (Revised September 1997.) View Details
  32. Grupo Sidek (A)

    A large Mexican conglomerate, active in tourism, real estate, and steel, is faced with difficult macroeconomic conditions beginning with the Peso crisis of December 1994. The conglomerate had extensive dollar-indexed liabilities and was caught in a crunch when the Mexian Peso lost half its value against the dollar in late 1994. Even though a large portion of its revenues were also dollar-indexed, thus ostensibly providing a foreign exchange hedge, most of the conglomerate's customers were Mexican nationals. With the ensuing recession in 1995, the revenue base dried up, but the dollar liabilities were still outstanding. The case covers the period from late 1994 to February 1995 and deals with the financial and operational decision that Sidek had to face at that time.

    Keywords: foreign exchange; real estate; debt policy; tourism; steel; Business Conglomerates; Macroeconomics; Currency Exchange Rate; Crisis Management; Valuation; Mexico;

    Citation:

    Froot, Kenneth A., and Alberto Moel. "Grupo Sidek (A)." Harvard Business School Case 297-022, September 1996. (Revised July 1997.) View Details
  33. Cross-Border Valuation

    Provides a review of valuation techniques used to assess cross-border investments. Discusses the discounting of free cash flows with a weighted average cost of capital and the use of adjusted present value. Special concerns such as foreign-exchange risk, country risks, and international diversification are also discussed. Unlike Note on Cross-Border Valuation, this note contains no discussion of valuing real options. A rewritten version of an earlier note.

    Keywords: Valuation; Cross-Cultural and Cross-Border Issues;

    Citation:

    Froot, Kenneth A., and W. Carl Kester. "Cross-Border Valuation." Harvard Business School Background Note 295-100, January 1995. (Revised August 1997.) View Details
  34. Syscom Computers

    Discusses a company deciding what it should do to manage its worldwide hedging operations.

    Keywords: Decisions; Currency Exchange Rate; Information Management; Management Practices and Processes; Risk Management; Operations;

    Citation:

    Froot, Kenneth A., Peter Tufano, and Chris L Marshall. "Syscom Computers." Harvard Business School Case 295-094, January 1995. (Revised May 1997.) View Details
  35. Telmex PRIDES

    The case examines an issue by a Mexican development bank of PRIDES written on Telmex stock. PRIDES are a dividend-enhanced security which are exchangeable into shares of the underlying stock. The focus is on pricing these instruments, which involve large peso-denominated payments at maturities beyond that of the Mexican yield curve. Further, the optionality of the PRIDES is interesting to analyze.

    Keywords: financial derivatives; securities; International Finance; Banks and Banking; Financial Instruments; Valuation; Mexico;

    Citation:

    Froot, Kenneth A., and Mark Seasholes. "Telmex PRIDES." Harvard Business School Case 296-009, March 1996. View Details
  36. Futures on the Mexican Peso

    The Chicago Mercantile Exchange needs to decide how to design, and whether and when to introduce, a futures contract on the Mexican peso.

    Keywords: Exchange rates; money markets; futures market; country analysis; International Finance; Financial Markets; Futures and Commodity Futures; Financial Services Industry; Chicago; Mexico;

    Citation:

    Froot, Kenneth A., Matthew McBrady, and Mark Seasholes. "Futures on the Mexican Peso." Harvard Business School Case 296-004, August 1995. (Revised October 1996.) View Details
  37. Note on Commodity Futures

    Describes how commodity futures work, what products and exchanges are available, and who the players in the commodity markets are. Also presents a careful discussion of the pricing of futures in commodity markets, focusing on cost of carry and risk premium approaches, and explaining backwardation and contango markets.

    Keywords: Futures and Commodity Futures;

    Citation:

    Froot, Kenneth A., Jay O. Light, and Nancy Donohue. "Note on Commodity Futures." Harvard Business School Background Note 293-018, July 1992. (Revised May 1996.) View Details
  38. An Investment Linked to Commodity Futures

    Describes a new investment which is linked to an index of commmodity futures prices. Explores how the index is constructed, how commodity futures (as opposed to other futures and spot prices) behave, and what the portfolio impacts of such an investment might be.

    Keywords: commodity market; investment management; portfolio management; Financial Markets; Investment; Investment Portfolio; Futures and Commodity Futures;

    Citation:

    Froot, Kenneth A., Jay O. Light, and Nancy Donohue. "An Investment Linked to Commodity Futures." Harvard Business School Case 293-017, July 1992. (Revised January 1995.) View Details
  39. An Investment Linked to Commodity Futures

    Describes a new investment which is linked to an index of commmodity futures prices. Explores how the index is constructed, how commodity futures (as opposed to other futures and spot prices) behave, and what the portfolio impacts of such an investment might be.

    Keywords: commodity market; investment management; portfolio management; Financial Markets; Investment; Investment Portfolio; Futures and Commodity Futures;

    Citation:

    Froot, Kenneth A., Jay O. Light, and Nancy Donohue. "An Investment Linked to Commodity Futures." Harvard Business School Case 293-017, July 1992. (Revised January 1995.) View Details
  40. Intel Corp.--1992

    Intel Corp., the world's dominant designer and manufacturer of microprocessors (the "brains" of the personal computer), has accumulated a large amount of cash (net of debt). Furthermore, it expects to continue to accumulate cash at an unprecedented rate. Has the company grown up to the extent that it can begin disbursing cash to its shareholders? What kind of disbursement policy should it choose? Intel will continue to face competition from imitators of its processors in the future, yet it is not clear whether its cash holdings can or will be a competitive weapon in this competitive battle. The case focuses on financial policy issues and on how they then interact with a very unusual and dynamic form of product-market competition and innovation. Can be used as a one- or two-day exploration of the following issues: complementarity externalities and costs of finance, appropriability of returns on investments, the role of finance in high-tech and rapidly innovating sectors, the strategic uses of cash, analysis of capital structure and cash disbursement policies, the use of financial policy as a competitive weapon, and timing in the sale and purchase of equity-linked instruments.

    Keywords: dividends; Financial Management; Competition; Multinational Firms and Management; Cash; Technological Innovation; Capital Structure; Investment Return; Equity; Financial Strategy; Corporate Finance; Semiconductor Industry; United States;

    Citation:

    Froot, Kenneth A. "Intel Corp.--1992." Harvard Business School Case 292-106, February 1992. (Revised March 1993.) View Details

    Research Summary

  1. International Finance

    Kenneth Froot's research spans a variety of topics in international finance. With regard to securitization of insurance risks, particularly those linked to catastrophes such as windstorms and earthquakes, he is exploring the feasibility of securitized reinsurance, the quantitative and qualitative properties of returns on insurance exposures, and the institutional pressures that exist in the marketplace today. Froot is currently organizing research conferences on these topics. A second focus is risk management for corporations and financial institutions. Here, Froot's research seeks to identify appropriate goals and implementation schemes for risk management programs, particularly in financial institutions in which profitability depends critically on the ability to manage risk. Finally, regarding asset allocation for investors, Froot is examining the impact of investor horizons on optimal currency hedge ratios and, in particular, on prudent asset allocation strategies. Other work in progress includes an inquiry into how stock prices are affected by the countries in which stocks are traded.
  2. Distribution of Insurance Risk

    Risks that originate with natural disasters such as hurricanes, earthquakes, and floods are substantial enough to exhaust the capital and surplus of insurers and reinsurers many times over. Despite significant advances in the efficiency of risk allocation in the financial system, these catastrophic risks are still largely allocated through brokered insurance and reinsurance agreements. Faculty involved in the Global Financial System project who are pursuing this stream of research, Kenneth A. Froot and Sanjiv R. Das, are studying primarily the institutional arrangements for distributing catastrophic risks. In addition to comparing public and private mechanisms for distributing and analyzing various securities designed to aid in the allocation or hedging of catastrophic risk, they have undertaken an empirical investigation of the pricing of catastrophic exposures. The latter work reveals the historical returns reinsurers have realized from writing catastrophic risks and provides a basis for testing hypotheses about the formulation of catastrophic cover prices.
  3. Risk Capital and Capital Allocation

    For the principal financial firms, proper risk control is imperative, and capital allocation exerts an impact on a variety of decisions related to: accounting for the profitability of individual businesses; entering or divesting businesses; determining profit-related employee compensation; choosing from among alternative organizational forms; and managing overall risk. Historically a top-down concern, principally of the CFO/treasurer, with the growing importance of off-balance sheet (derivatives) positions, these issues have also fallen squarely into the domain of the "risk manager," a bottom-up perspective. Of central importance is the need for a unifying framework to reconcile the two perspectives that can be applied on a firmwide basis. The determinants of the costs of risk capital and possible approaches for measuring and allocating these costs to the individual businesses that comprise a firm are receiving particular emphasis in the Global Financial System project. Principal researchers in this area are Andre F. Perold, Kenneth A. Froot, and Robert C. Merton.
    1. Awarded the 2008 Witt Award of the American Risk and Insurance Association for his article, "Risk Management, Capital Budgeting, and Capital Structure Policy for Insurers and Reinsurers" (Journal of Risk and Insurance 74, no. 2, June 2007).

    2. Winner of the 1998 Journal of Financial Economics First Place Jensen Prize for Corporate Finance and Organizations for "Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach" (with Jeremy Stein, January 1998).