Risk Management Task 1a Essays

4772 Words Jan 7th, 2014 20 Pages
JIT Task 1 Risk Management
Risk Management

From the last decade risk management is the most researched and exciting area in the financial industry as it elaborates how to minimize and avert the hazard of risk from the portfolios of different assets and from the operations of financial institutions. Regulators and depositors mainly emphasize the risk management and according to them risk management is an essential ingredient to enhance the value of shareholders and increase their level of confidence. Risk management is the assessment of risks to mitigate, monitor and control the probability or impact on uncertain events. Risk management methods vary from industry to industry for instance it cannot be same for project management,
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Lack of electricity needed to power assembly lines, collapse of a computer network, disruptions in the sourcing of raw materials or misdirection of payments or orders are examples of operating risks. Risk can also be classified in the pure or speculative form. Pure risk is any exposure that results either in a loss or in no loss, but can never generate a gain; speculative risk is an exposure that can result in a gain, a loss, or no loss. In general, operating risks are often pure risks (e.g. if an assembly line fails to function as expected loss results and if it functions as it should no loss occurs), while financial risks are often speculative risks (e.g. if interest rates rise the cost of funding rises and a loss occurs, if interest rates decline the cost of funding declines and a saving or „gain,‟ results). Risk can also be classified by frequency and severity. Though the specter of risk is present in virtually all business activities, the frequency of occurrence can vary widely. Some exposures can create losses (or gains) every day, week, or month. For instance, currency rates move every day and a firm with unhedged foreign exchange risk that revalues its operations to daily closing rates will experience a loss (or gain) each business day.

Why Should Firms Manage Risk? From a purely academic perspective, corporate interest in risk management seems curious. Classic portfolio theory tells us that investors can eliminate

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