Corporate Risk Management Assignment Example | Topics and Well Written Essays - 2250 words

Corporate Risk Management - Assignment ExampleDerivatives Derivatives refer to a method where one party owning a find transfers the risk to a nonher individual (Malz 189). The party receiving the risk bears the risk but at the same time has the advantage of making a profit is the risk does not materialise. The original owner of the risk does not have to pay anything to the risk buyer but has to forego any benefits derived from the non-occurrence of the risk. The advantage of this method of risk way to the business over using insurance is that the business is not obliged to pay any insurance premiums and therefore the only represent is the opportunity cost which the business has to bear due to not being able to benefit when the risk does not occur (Deventer & Imai, 48). The market for derivatives has grown significantly for some time, maybe because of the increasing risks in the global business environment. Globalisation and technology have brought many opportunities to the busin ess environment but at the same time brought numerous risks to businesses around the worlds (Norman, 58). As several risks have increased and their intensity in terms of likelihood and impact has increased, the need to have better ways to recognize the risks has also increased. In such an environment, derivatives made from financial risks have increased and there are unassailables which are dedicated to trading on derivatives. Derivatives come on all sorts of nature, depending on the nature of risk (Triantis, 563). Forwards Forwards are a very good tool for managing some types of financial risks. These are risks associated with unhoped-for unfavourable changes in the market environment in the future (Darrell, 78). For instance, a firm may be concerned that the rate of exchange will change unfavourably in the future and thus affect its revenues. This usually happens with regard to firms which operate across international borders. In this kind of scenario, the firm can accept to h ave a forward contract with its customers or suppliers (Verzuh, 59). Forward contracts help the business in guaranteeing that its revenues or its business will not be affect in the future by making sure that the natural laws of the market will not come into action. For instance, in the example given above, a firm may have a forward contract which binds its suppliers to deliver the goods at a predetermined dollar rate regardless of the currency exchange range in the future. This means that such a firm will operate without worrying that unexpected foreign exchange rates will affect its revenues in a negative way. Decentralising the business functions As identified above, currency risk is one of biggest risk which international businesses have to face today. In a modern business environment, even a slight change in the currency exchange rates can lead to massive losses for firms which compose their products locally and sell them abroad (Gregory 57). In this regard, apart from forwar d contracts, there are other options which such firms can consider in order to conk currency risks. These include the decentralisation of business to other countries especially where the business has the biggest markets. This has been demonstrated by the recent trend of American manufacturers going to china to mold their manufacturing firms there. One of the firms which have been known to have been the first one to use this strategy of