Reasons to manage risk Firms deal with different types of risk in their day-to-day operations and adopt risk management strategies. It is important to understand why firms manage risk. The management of Newcastle Coal Co. told the company's board of directors that they have better insight into the firm's risk exposure than outside investors. The firm's management used this as an argument for why it makes the most sense for management to use derivatives to manage the company's risk. They argued that this was more favorable than outside investors purchasing derivatives on their own to manage the risk associated with their investment in the company. Of the following reasons to manage risk, which is management most likely concerned with? Compensation systems Comparative advantage in hedging Tax effects Suppose you are comparing two very similar firms. Their operations are the same, and they differ only with respect to the volatility of their earnings. One firm has a risk management program that effectively stabilizes its earnings, and the second firm has more volatile earnings. Which firm is likely to pay more in taxes over the long run? The firm with volatile earnings The firm with stable earnings