Discuss the below:
Q1: "Risk Management"
Assess the current market risk in the U.S. and Foreign Markets, indicating how a financial manager is likely to react given the risk level determined. Provide support for your answer.
Considering the market risks of interest rate, foreign exchanges, and commodity price risk, assess the risk that you believe may have the most significant impact on a firm. Indicate how this risk can be managed effectively to minimize the effects of this risk.
Please provide one citation/reference for your initial posting that is not your textbook. Please do not use Investopedia or Wikipedia.
It's important to measure and keep daily tabs on a firm's potential liability from financial price risk. Financial institutions whose core business revolves around managing and accepting financial price risk have whole departments devoted to the independent measurement and quantification of their exposures. There are three types of risk for every particular financial price to which a firm is will be exposed. It's necessary to measure and keep regular tabs on a firm's possible liability from the financial price risk. Financial institutions whose core business spins around managing and allowing financial price risk have entire units dedicated to the independent determination and quantification exposures. The three kinds of risk for each particular financial price to which a firm will face is:
Transactional risks:
It indicates the negative result of variations in financial prices on the cash flows that occur from the investing or transactions. The sort of risk explained in this case of the pulp-and-paper company and its US$10 million contracts. Its funding difficulty can be defined as the transactional risk. Translation risks explain the differences of a foreign asset due to the differences in financial prices, such as foreign exchange rate.
Economic exposure:
It is the result of variations in the financial prices on a center business of the firm. If growing markets economies depreciate clearly whereas maintaining their significant technology production support. What impact will it produce on the Ottawa-based chip company that only has transactions in Canada?
Importance:
It is critical for the financial risk management to the survival of every non-financial organization. They need to identify the good risk management programs and the inferior ones.
Considering the market risks of interest rate, foreign exchanges, and commodity price risk, assess the risk that you believe may have the most significant impact on a firm. Indicate how this risk can be managed effectively to minimize the effects of this risk.
Bonds and the different fixed-income investments tend to be sensitive to changes in the interest rates. If interest rates increase, the value of these investments decreases. Most importantly, why would someone fund complete payment for your bond at 2% when new bonds exist issued at 4%? Apparently, the opposition is also correct. When interest rates decrease, existing bonds rise in value.
References:
What is hedging: Managing Financial Price Risk - Finpipe. (n.d.).
Investment Risks: Article: Investment Risks. (n.d.).