On most days, Simon Lalancette finds himself in a classroom, spinning war stories for his MBA students at the Ecole des Hautes Etudes Commerciales (HEC) in Montr?al about his work for utility giant Hydro-Qu?bec. His assignment: to infuse a little academic theory into practical risk management and organize a financial engineering staff within the corporate treasury of one of North America's largest generators of electricity.

No doubt, Lalancette's work there–which started in 1998–was a far cry from the more contemplative world of academe. But for Hydro-Qu?bec, the simple incursion of one professor of finance has transformed the company's risk management from a basket of scary weaknesses to be guarded against with hedges into a portfolio that is managed in a rigorously quantitative way by between two and four financial engineers. "There is diversification value in a risk portfolio, as surely as there is diversification value in a portfolio of stocks," observes Lalancette, who still works one day a week for Hydro. And it was his job to teach Hydro-Qu?bec's treasury professionals how to determine it and then make it work to their advantage.

What is risk portfolio management? Basically, it is the discipline of recognizing statistical offsets between different kinds of risks and then creating an economical response to that cumulative risk. Let's take a very simple example. Hydro, wholly owned by the province of Qu?bec, now carefully computes historic correlations between commodity and currency exposures to create a single hedging strategy rather than one for commodities and another for currencies.

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