Honeywell

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Introduction

Honeywell is a Multibillion dollar company, operating in 95 countries and is a pioneer in the field of control system and industrial appliances. With revenue over $7.3 Billion and income above $400 Million (December 1996), the company was exposed to several types of risk as it operated in a global territory.
Previously, the company had a much compartmentalised approach to risk management, with individual departments managing individual risks pertaining to them. For instance, currency risks were hedged using futures contracts and under the supervision of the Financial Risk Management Unit while traditional (hazard) risks were insured by its treasury – Insurance Risk Management Unit. However, this individualistic approach
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These 20 currencies represented 85% of the company’s foreign profits o This option provided protection when the US Dollar strengthened against the currency basket. This basket was purchased late in the year from banks, after forecasting the company’s planned and expected foreign profits for the next year o 3 years estimated foreign currency exposure was submitted by each operating unit to HQ o The notional amount was 80% to 90% of upcoming fiscal year’s total exposure o The basket option’s strike price weighted different currencies to reflect proportion of firm’s profits originating in a given country. Annual option premium ranged between $ 3 – 9 million and averaged $ 5 million.

Analysis of New Integrated Risk Management Program
Features
 First of its kind
 Provided combined protection against HW’s currency risks along with other traditionally insurable risks
 Multi-year
 Insurance based
 Integrated risk management program
 Would extend its innovation into the financial arena
The new Enterprise Risk Management (ERM) Program provided pooled protection against Honeywell’s currency risk along with other traditionally insurable risks. Analysis of the program and individual tasks was done by a joint committee formed with group members of both the insurance unit and currency unit.
Retention level and insurance coverage for the combined risks were identified in line with the industry

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