a1 Deloitte, Postboks 1600, 0900 kbh. C., Denmark., Email: firstname.lastname@example.org
a2 Department of Economics, London School of Economics, Houghton Street, London WC2A 2AE, U.K., Email: email@example.com
a3 Royal&SunAlliance Codan, 60 Gammel Kongevej, DK-1790 Copenhagen V, Denmark., Email: firstname.lastname@example.org
We investigate the model of Froot & Stein (1998), a model which has very strong implications for risk management. We argue that their conclusions are too strong and need to be qualified. We also argue that their analysis is incorrect and incomplete. Specifically, there are some unusual consequences of their model, which may be linked to the chosen pricing formula.