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Corporate Risk Management
1. Introduction to Concepts
of
Corporate Risk
Management
By
Shravan Bhumkar
(KH08JUNMBA100)
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar
2. What is Risk ?
ā¢ āRisk is an event or injury that can cause damage to an institution`s
income and/or reputationā.
ā¢ āIt is like energy that can not be crated nor destroyed but only can be passed
on or managedā.
ā¢ āThere is direct relationship between risk and reward and the quest for
profit maximization has given rise to accelerated risk taking for enhanced
rewardsā.
ā¢ āWhatever be the type of risk, impact is primarily financial. Ultimately risk
manifest in the form of loss of income and reputationā.
Source : āTheory and practice of treasury and risk management in banksā- IIBF
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar
3. What is Risk ?
ā¢ Risk is part of any business`s lexicon and understanding and subsequently
managing it is the most important concern.
ā¢ The risk is inherent in the business.
ā¢ Given the importance of risk management, it is no wonder that it is today
receiving scrutiny from the world`s top most organizations, banks, financial
institutions, regulators , governments and so on.
ā¢ Organizations and institutions put tangible assets (such as funds, technology,
processes and people) and intangible assets (such as reputation, brand and
information) at risk to achieve their objective.
ā¢ Whether the organizations are for profit or not for profit the task of
management is to manage these risks in the uncertain environment.
Source : āTheory and practice of treasury and risk management in banksā- IIBF
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar
4. Organizational management
has
thus become
synonymous with
risk management
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar
5. Sources of risk
ā¢ Interest rate risk
Interest rate risk is the risk of an adverse effect of interest rate movements on a
firm`s profit or balance sheet. Interest rates affect a firm in two ways by affecting
the profits and by affecting the value of its assets or liabilities.
ā¢ Exchange risk
Exchange risk is a possibility of adverse effect on the value of firm`s assets,
liabilities or income, as a result of exchange rate movements.
ā¢ Default risk
It is the risk of non-recovery of sums due to from outsiders, which may arise
either due to their inability to pay or un-willingness to do so.
ā¢ Liquidity risk
Liquidity risk refers to the risk of possible bankruptcy arising due to the inability
of firm to meet its financial obligations.
Source : A book on āStrategic financial managementā by ICFAI University
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar
6. Sources of risk
ā¢ Business risk
It is the risk faced by business from its external and internal environment.
Internal factors like labour strike, death of key personnel, machinery break-down
etc. External factors like government policy, changes in customer preference etc
ā¢ Financial risk
It refers to bankruptcy arising from possibility of firm not being able to repay its
debts on time. Higher the debt-equity ratio of firm, higher the financial risk faced
by it. Liquidity risk and wrong capital structure are the prime reasons for
financial risk .
ā¢ Market risk
It is the risk of value of a firm`s investments going down as a result of market
movements. It also referred as price risk.
ā¢ Marketability risk
This is the risk of the assets of a firm not being readily marketable.
Source : A book on āStrategic financial managementā by ICFAI University
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar
7. The changing form of risk
ā¢ We all know is risk is associated with every business activity. In a repressed
financial system risk is not apparent.
ā¢ The earlier ethos inspect/detect/react have been substituted with new
concepts like anticipate/prevent/monitor/mitigate.
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar
8. Risk management process
I. Determining objectives
ā¢ It is a first step, may be profits, or to develop competitive advantage.
ā¢ It is to be decided by management.
II. Identifying risks
ā¢ Each corporate needs to identify the possible sources of risk and the kinds of risk
faced by it .
III. Risk evaluation
ā¢ Once the risk is identified, they need to be evaluated for ascertaining their
significance.
ā¢ The significance depend upon the size of loss that it result in, and the probability of
the occurrence of such loss.
Source : A book on āStrategic financial managementā by ICFAI University
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar
9. Risk management process
IV. Development of policy
ā¢ Based on tolerance level of the firm, the risk management policy needs to
developed.
ā¢ The time frame of policy should be comparatively long, so that the policy is
relatively stable.
V. Development of strategy
ā¢ The tenure of a strategy is shorter than policy it needs to factor in various
parameters that keep changing.
ā¢ A strategy is essentially an action plan, which specifies the tools, techniques and
instruments that can be used to manage these risks.
ā¢ For example Derivatives
Source : A book on āStrategic financial managementā by ICFAI University
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar
10. Risk management process
VI. Implementation
ā¢ This is the operational part of risk management
ā¢ It is finding the best deal in case of risk transfer, providing for contingencies
in case risk retention, designing and implementing risk control programs, etc.
VII. Review
ā¢ The function of risk management needs to be reviewed periodically.
ā¢ Monitor effectiveness of the decision taken previously.
Source : A book on āStrategic financial managementā by ICFAI University
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar
11. Risk management techniques
Two kinds of techniques used for management of various
categories of risk
1. Internal techniques are those that are a part of the
day-to-day operations of the firm.
2. External risk are those that require the company enter
into some kind of financial contract with a market
entity
Source : A book on āStrategic financial managementā by ICFAI University
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar
12. Risk management techniques
ā¢ Management of business risk
Some of business risks are not manageable, i.e. they
have to be borne
Operational risks can be managed by building
flexibility into operations
ā¢ Asset-liability management
Marshall & Bansal describes ALM as ā an effort to
minimize exposure to price risk by holding the
appropriate combination of assets and liabilities so as
to meet the firm`s objective and simultaneously
minimizing the firm`s riskā
To manage interest rate risk and exchange risk
Source : A book on āStrategic financial managementā by ICFAI University
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar
13. Guidelines for risk management
ā¢ Common goal of risk management and financial
management
ā¢ To create shareholder wealth
ā¢ To generate Net present value
ā¢ Proper mix of risk management techniques
ā¢ No risk management is fool proof or complete in itself
ā¢ Employs most optimum mix of risk control, risk
prevention, risk transfer and risk retention
ā¢ Proactive risk management
ā¢ Number of uncertainties involved in financial
markets
ā¢ Continuous changes in interest rate, exchange rates,
commodity prices, economic variables and external
environment is a reality
ā¢ Risk management cannot be done after the
happening of an event, it has to be done in its
anticipation.
Source : A book on āStrategic financial managementā by ICFAI University
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar
14. Guidelines for risk management
ā¢ Flexibility
ā¢ Risk management strategies should not be too rigid
ā¢ They should be flexible enough to allow risk manager
to make most appropriate decision in according to the
circumstances
ā¢ Bringing risk to the optimal level
ā¢ The maintenance of risk at the level of optimal (The
risk bearing capacity of the firm)
ā¢ Firm should not be exposed to risks which may results
in its liquidation
ā¢ Risk substitution
ā¢ In general, risk management techniques do not
eliminate the risk completely but substitute it by
another kind of risk
Source : A book on āStrategic financial managementā by ICFAI University
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar
15. Thank you.
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar