Why Firms Should Manage Financial Risks?

3608 WordsOct 18, 200915 Pages
Q) Why firms should manage Financial Risks? INTRODUCTION: The etymology of the word “RISK” can be traced to the Latin word “RESCUM” meaning danger at sea or that which cuts. Managing business in a highly volatile environment is like navigating a ship on stormy seas. The modern business is confronted with many risk, some of which are basic eg., loss of property due to natural calamities, civil unrests etc., and some are strategic risks. Strategic risks may manifest themselves in several ways like foreign exchange rates or interest rates or commodity prices impacting the expected value or the real cash flow. In recent years, life has become a lot more complicated. Today firms are confronted with business risks that are…show more content…
The term “risk” really covers two things which, in there casual relations to the phenomena of economic organization. Risk management with regard to firms In enterprise risk management, a risk is defined as a possible event or circumstance that can have negative influences on the Enterprise in question. Its impact can be on the very existence, the resources (human and capital), the products and services, or the customers of the enterprise, as well as external impacts on society, markets, or the environment. Risk- sensitive industries Some industries mange risk in a highly quantified and numerate way. These include the nuclear power and aircraft industries, where the possible failure of a complex series of engineered systems could result in highly undesirable outcomes. The usual measure of risk for a class of events is then, where P is probability and C is consequence. The total risk is then the sum of the individual class-risks. In the nuclear industry, ‘consequence’ is often measured in terms of off-site radiology release. Objective of Risk Management Though it may be difficult to outline specific targets for risk management, some of the main objective of Risk management is to reduce different risks related to a pre-selected domain to the level accepted by

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