Hypocom Risk-Financing Case

A group case that simulated a manufacturer’s cash flows under fire, steel-price, competitor, and strike risk, then compared five ways to finance those risks against a $6M free-cash-flow floor.

Role

Risk analyst and co-author

Context

Fall 2024 · RMI 655 risk financing (with MBA students)

Team

Three-person team

Deliverable

Risk case report + simulation

Summary

The question

Hypocom needed at least $6M of free cash flow to fund a competitor acquisition without borrowing. The question was which risk-management choice best protected that floor for its cost.

What I did

Modeled revenue ($500 price, 40,000 expected units ±20%), fixed and steel costs, and fitted fire frequency and severity distributions in @RISK, with correlations between the risk drivers.
Added the cost of a new market entrant and a union strike, then simulated free cash flow and the cost of financing any shortfall.
Compared five options (no action, separate fire policies, a bundled fire policy, a steel-price hedge, and a dual-trigger policy) on expected loss, correlation, and effect on net cash flow.

What it showed

Judging each option by expected loss, how the losses move together, and the effect on net cash flow, rather than by premium alone, pointed to separate fire policies for inventory and property.

From the work

After evaluating the cost-effectiveness, coverage, and financial implications of each option, we recommend: Option (2) Fire Insurance Policy (A): Separate Policies for Inventory and Property Damage. Our decision was guided by criteria such as expected losses, correlations for the expected losses, and effect on net cash flows.
Group report, executive summary

The five options we compared
Option	How it works
1. No risk management	Retain all fire, steel-price, competitor and strike risk
2. Separate fire policies (recommended)	Inventory: $430K premium, $500K deductible, $15.5M limit. Property: $195K premium, $250K deductible, $5.25M limit
3. Bundled fire policy	$590K premium, $1.0M annual aggregate deductible, $30M limit
4. Steel-price hedge	$250K upfront; pays $144K for every $0.01 the average steel price exceeds $0.42/lb
5. Dual-trigger policy	Pays only when steel is above $0.35/lb and a fire causes more than $250K of damage

The five options we compared

Option

How it works

1. No risk management

Retain all fire, steel-price, competitor and strike risk

2. Separate fire policies (recommended)

Inventory: $430K premium, $500K deductible, $15.5M limit. Property: $195K premium, $250K deductible, $5.25M limit

3. Bundled fire policy

$590K premium, $1.0M annual aggregate deductible, $30M limit

4. Steel-price hedge

$250K upfront; pays $144K for every $0.01 the average steel price exceeds $0.42/lb

5. Dual-trigger policy

Pays only when steel is above $0.35/lb and a fire causes more than $250K of damage

In my words

I completed this case in my risk financing class, which I took alongside MBA students. The project compared different ways to finance several business risks while protecting a minimum cash-flow level. I enjoyed the class because it approached risk as a capital-allocation decision, not simply an insurance-purchasing decision.