Risk Management Analysis Essay

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This assignment will discuss the theoretical basis of financial risk, because managers need to be aware that financial risk its present in all sectors of activity so that they can run business efficiently and take advantageous investment choices, considering the different types of financial risk relevant to the current economic climate, as well as evaluating the methods available to business for managing, and by observing a case study where risk management has possibly failed. Risk is the doubt about future gains or losses, thus such doubts reveal that some future expectation and their impact cannot be predicted Chorafas (2008). Markowitz cited in Brigham, Gapenski and Ehrhardt (1999), argues that the portfolio theory can get high…show more content…
However Arnold (2002), argues that, it can only be used for European Options, that the share does not pay dividends, and the share price does not vary, although the model´s assumptions may be adaptable. Modigliani and Miller as cited in Damodaran (2001), created a model arguing that if the market is efficient, no matter how the firm finances itself, with debts or equity, the value of the firm will remain the same, because both firm and shareholders will have same the value for rate of return, thus the unique factor capable of influencing the capital structure is the cash flow generated. However Arnold (2002), suggests that Modigliani & Miller have created a model that might be based in assumptions, which in reality might not work, because there exist costs affecting the capital structure of a firm, as paying taxes. Additionally high gearing levels may increase risk of failing, thus it lies a need to have a pro-active thought about its assumptions before place it into practice. When undertaking an investment several types of risk may arise, Brealey et al. (2001). Banks are vulnerable to liquidity risk because the more they create liquidity the greater is the exposition to losses, Diamond cited in Voon-Choony et al. (2010). Gatev cited in Voon-Choony et al. (2010) supports that, banks make agreements to lend
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