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

Corpo count Risk Management - Assignment casingDerivatives Derivatives refer to a method where one party owning a peril transfers the risk to another individual(a) (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 submit to pay anything to the risk buyer but has to forego any avails derived from the non-occurrence of the risk. The advantage of this method of risk management to the concern oer using insurance is that the business is not obliged to pay any insurance premiums and therefore the moreover cost 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 place for derivatives has grown significantly for some time, perhaps because of the increasing risks in the global business environment. Globalisation and technology fall in brought numerous opportunities to the business environment but at the same time brought numerous risks to businesses around the worlds (Norman, 58). As several risks claim increased and their intensity in terms of likelihood and impact has increased, the need to have better ways to manage the risks has also increased. In such an environment, derivatives made from financial risks have increased and there are firms which are dedicated to calling 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 unexpected unfavourable changes in the market environment in the future (Darrell, 78). For instance, a firm may be concerned that the rate of exchange ordain change unfavourably in the future and thus affect its revenues. This usually happens with compliments to firms which decease across international borders. In this kind of scenario, the firm can choose to have 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 affected 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 disregardless of the currency exchange rates in the future. This means that such a firm will operate without worrying that unexpected foreign exchange rates will affect its revenues in a invalidating 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 manufacture their products locally and snitch them abroad (Gregor y 57). In this regard, apart from forward contracts, there are other options which such firms can look at in order to eliminate 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 set their manufacturing firms there. One of the firms which have been known to have been the first one to use this strategy of