Risk Management in Corporate Finance

Hedging is a significant measure of financial risk management. Since the 1970s, the increasing number of powerful companies started to control the risk of the exchange rate, the interest rate and commodity by using financial derivatives. ISDA (2013) based on the Global 500 Annual Report 2012 survey found that 88 percent of companies use foreign exchange derivatives. Modigliani & Miller (1958) believed that if the financial markets were under perfect conditions, for instance, there was no agency costs, asymmetric information, taxes and transaction costs, hedging would not increase the company 's value because investors can hedge by themselves. However, a large number of practical studies have shown that hedging is beneficial

The idea of “risk” is used in many fields and industries. There has been large efforts made towards the understanding of risk. Since, risk varies so much depending on the field of study, the need for learning about it is warranted. As can be imagined, the importance of risk in a market economy is crucial. In the 1990s, JP Morgan made the Value at Risk (VaR) a central component of its work efforts (Cecilia-Nicoleta, Anne-Marie, & Carmen-Maria, 2011).

As time has shown, financial institutions undertake an abundance of uncertainty causing unpredictable risk consequences. As a result, executives instill risk management programs to assist in managing the organizations risks so they align with the company’s goals. Commonly sought goals include legal and regulatory compliance, tolerable uncertainty, survival, business continuity, earnings stability, profitability and growth, social responsibility and economy of risk management operations. Through the implementations of goal oriented programs, an organization can effectively minimize risk uncertainty. All organizations including financial institutions encounter risks from each risk

Because of rapid economic growth in XXX over the past years has increased the fear of major business failure, risk has become an overwhelmingly dominant business topic. As a result, top managers are now focusing on risk management in their companies. As each business entity struggles with its own set of needs and circumstances, the need and flexibility to address this continuously changing and volatile economic environment, would be extremely challenging and fulfilling to me.

Credit risk consists of three parts: the size of the exposure at the time of default, the probability of default occurring, and the loss if the credit event occurs (Fraser & Simkins, 2010). Undoubtedly, a combination of a clear strategy, a knowledge of analytical tools, an understanding of the risk management instruments, responsible oversight, and the ability to be intuitive is crucial to risk management (Bethel, 2016). Wells Fargo is one of the most successful banks in the United States in managing risk. Successfully, they have navigated through risk by choosing a course of action determined by their risk management process (Perez, 2014).

According to IRM-AIRMIC-ALARM (2002), risk management actually defines every organisational strategic management; it comprises the process which identifies and treats the internal and external risks and adds sustainable value to the organisation and its stakeholders by decreasing the probability of not achieving the organisation’s overall objectives. The specific institutes suggest that risk management lies in the strategic, tactical and operational levels, and its embodiment in all tasks and roles is required; it is a consistent manner for an organisations’ operation, which leads to effective decision making, efficient allocation and protection of the organisational assets, and enrichment of the organisational

According to Titman et al. 2012, “Financial management is the study of how people and businesses evaluate investments and raise funds to finance them” (Titan, 2012, p. 3). Lately, it has become very important to investors and creditors to pay attention to the data and statistics that are being released by companies and their financial status. The information that is released in these statements allows investors and creditors to know the safety and profitability of their investments.

This document is authorized for use only by Yen Ting Chen in FInancial Markets and Institutions taught by Nawal Ahmed Boston University from September 2014 to December 2014.

References:Rawls S W, Smithson C W. Strategic risk management. Journal of Applied Corporate Finance, 1990, 1:6-18)Brealey, R., and Myers, S. (2002) Principles of Corporate Finance, 6th edition, NewYork: McGraw-Hill Higher Education.

Capital budgeting risk can be measured from three perspectives. First, the project standing alone risk, is a project’s risk ignoring the fact that much of this risk will be diversified away. Secondly, would be the project’s contribution - to - firm risk, which is the amount of risk that the project contributes to the firm as a whole, thus, considering the fact

In all levels of an association, risk management is an essential segment of great administration and choice (Berg, HP 2010). It is really important for a company like Disney to manage their risk that are occurring for their expansion project. Where according to Berg, HP (2010) by having risk management will help in focusing the setting and portion of breaking points of the company, and it will also focus on mitigating the risk, endorse all activities that leads to innovation so the company will achieve good results at the end of the decision making. On the other hand, by managing risk company can improve their efficiency and effectiveness on making decision and using resources and lower down their cost of the capital (Ho, TSY & Lee, SB 2003).

In order to effectively treat risk, firms must first apply a risk management framework and process. The enterprise-wide risk management process provides a broad approach to address and manage all of an organizations risk. Furthermore, this technique is comprised of four components, lead and establish accountability, align and integrate, allocate resources, and communicate and report. When implemented together these components are the essential to achieving an organizations goals. Moreover, five risk management steps reinforce the enterprise-wide framework process and begins with scanning the environment, identifying the risks, analyzing the risks, treating the risk and lastly, monitoring the risks to ensure they are being controlled and eliminated (Elliott, 2012). Banks in particular have a variety of risks which can be addressed using enterprise-wide risk management techniques. For example, ABC Community Bank would be subject to a number of financial risks, including interest rate risk, liquidity risk, credit risk and price risk. With just 30 employees and one location, the organization is small and the company’s ability to absorb financial risks and survive is improbable. Therefore, the organization must take the necessary steps to address the company’s financial risks to ensure continuous survival and goal achievement.

Risk management is an activity which integrates recognition of risk, risk assessment, developing strategies to manage it, and mitigation of risk using managerial resources. Some traditional risk managements are focused on risks stemming from physical or legal causes (e.g. natural disasters or fires, accidents, death). Financial risk management, on the other hand, focuses on risks that can be managed using traded financial instruments. Objective of risk management is

As well as hedging also allows investors to separate between legitimate and irresponsible risk-taking management behaviour. Therefore, hedging provides a solution by endorsing corporate governance practices which allows investors to assess managerial performance. Investors would take observe the benefit of hedging as it permits investors to not only accept that firms with more stable returns have superior managers but measure management quality more easily as

Risk managers have new and different responsibilities that need a new set of skills to help carry out these new responsibilities. (Bugalia, J., & Kallman, J. 2012) They are expected to come to a decision for an organization with successive analysis. The process of risk management technique helps provide a guide to the realistic actions to take when setting an organizational goal and standard operating procedures with evaluation of the organization’s resources, internal and external environment. Problems can be defined by a combination of political, economic, social, technological, legal and environmental factors with fuzziness, incompleteness and randomness. (Forbes, D. R., Smith, S. D., & Horner, R. W. 2010) Some techniques that Dr.