Risk Management

Résumé du document

In this document, we examine two different organizations. We aim at determining several strategies to mitigate the credit or operational risk in each organization. For each firm, we describe the recommended strategy and discuss the position of the firm. A risk is a potential negative impact to an asset which can occur; it is also defines as a probability of a loss or a threat to an organization. The ERM (Enterprise Risk Management) could be defined as the sum of all proactive management directed identification, analysis and economic control. The enterprise risk management is the fact that companies realize the existence of such risk and decide to take this factor into account when implementing their business. Thanks to ERM, companies allow them to conduct their activities in a changing and complex competitive environment; to react quickly and correctly to constantly changing conditions; to help owners, the board and management deal with risks in all aspects of operations. The effect of the enterprise risk management is to increase confidence of all business partners, shareholders and co-workers in the company: that is why it offers such a good competitive advantage. Indeed, the ERM impacts the company's management through a wide point of view horizontally: across all operations of an organization which deals with speculative and pure risks, and vertically, from the strategic level, thanks to the management team, which gives objectives to the front-line employees.

Extraits

[...] The difference between transaction exposure and translation exposure is that the transaction exposure represents the effect that unanticipated changes in exchange rates can have on the firm's cash flows, and the translation exposure is the effect that unanticipated changes can have on firms consolidates financial statements. Indicative bibliography Enterprise risk management. By David Louis Olson and Desheng Dash Wu, edited by World Scientific Simple tools and techniques of enterprise risk management. By Robert J. Chapman, edited by John Wiley & Sons, 2006. [...]

[...] A CDS is a privately negotiated bilateral contract between two parties. It is a contract that provides one party the insurance against the risk of default by a specified company known as the ‘reference entity'. The buyer of protection pays a fixed premium (CDS spreads) to the seller of protection for a period of time and obtains the right to be compensated when there is a ‘credit event'1. If no credit event occurs, the buyer will continue to pay the premium until maturity. [...]

[...] Firm 1 Firm 1 is a large multinational organization with operations in several countries. The company's industry is currently experiencing an economic downturn. While the firm is currently in good shape, it wishes to avoid bad news as it is concerned about further economic downturns. The firm owns a variety of bonds in its investment portfolio. They are not currently worried about market risk. If the bonds were to decline in value due to credit events, the firm would experience losses it wishes to avoid. [...]

[...] What is the management assessment? What are the risks indicators? It's also important to implement tools to measure the severity of the damages, their probability, the expected losses and the deviation. Thanks to the collected data of the company, the risk manager will be able to calculate statistic. Thanks to his analysis, he will be able to create tailor-made tools for the company to measure its risks and to plan the reactions in a case that it would happen. The risk control This stage is the ability to adapt and built a new risks management strategy depending on the market evolution. [...]

[...] It refers to the action of using a currency that will provide an offset to expected cash flows. For example, a company that opens a subsidiary in another country and borrows in the local currency to finance its operations, even though the local interest rate may be more expensive than in its home country. Currency risk sharing, it is an agreement between two companies to share the currency risk associated with the transaction. The arrangement involves a customized hedge contract embedded in the underlying transaction. It is a way to reduce risks. [...]