The management of Atlanta Aeronautics Company told the companys board of directors that they have better insight into the firms risk exposure than outside investors. The firms management used this as an argument for why it makes the most sense for management to use derivatives to manage the companys 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?

a) Tax effects

b) Comparative advantage in hedging

c) Compensation systems

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?

A) The firm with stable earnings

B) The firm with volatile earnings