Tang studied the exchange rate exposure of Chinese enterprises at the level of industry and enterprise. Chinese enterprises are expanding their business overseas, but because of lack of understanding of the risk of money, exchange rate risks are often ignored in practice. In order to manage exchange rate risk, this study suggests that Chinese enterprises should set up special committees to hedge against future cash flows, especially for non-financial companies (2015, p.605).Polodoo,Seetanah and Sannassee concluded that, as the result shows that much of Africa 's manufacturing industry is affected by exchange rate fluctuations. Exporters are facing risk aversion and African economies should seek help from developed and emerging countries in developing financial markets and hedging tools (2016, p.254). The study of Yazid and Muda shows that multinational corporations are involved in the management of foreign exchange risk mainly because they try to control the overall cash flow by the currency fluctuations.
In banking, the suitable definition of risk is “exposure to uncertainty of outcome”. Exposure refers to a position in the outcome, without which our interest is merely academic. Outcome is the consequence of a particular course of action. Else, uncertainty is defined as the volatility of potential outcomes. The greater the volatility, the higher the risk (Eddie Cade, 1997).
According to Aswathappa (2008, p. 118), a political risk is „any government action or politically motivated event that could adversely affect the long-term profitability or value of a company“. Correspondingly, the political risk encompasses all changes in a political environment that could negatively affect the business operations of the companies. The political risk, also, may be a result of some changes in government regulations, civil unrest, war or politically motivated terrorism. Table 3 shows the most common examples of political risk that multinational companies may face when operating in a certain host country. The intensity of the political risk differs between countries.
The term ‘risk’ implies a possible negative or uncertain outcome of an event or situation caused by nature or human activities where insufficient knowledge was available to predict or prevent such outcomes. What is Risk Management? Risk Management is defined as the forecasting and evaluation of financial risks together with the identification of procedures to avoid or minimize their impact. (Anon., 2017) For my assignment I will be focusing on Deepwater Horizon which was a catastrophic event as a result of poor risk management in the organisation BP (British Petroleum). On the 20th of April 2010 an explosion on the Deepwater Horizon Macondo drill platform killed 11 people, 17 seriously injured and started the largest oil spill in the history
Operational Risk leads to downfall of the Banking and Financial Institutions. Banking and financial institutions markets are transforming over growing consolidation, rising customer expectations, proliferating financial engineering, increasing regulatory requirements, uprising technological innovation and mounting competition. This increases the probability of operational failures, thereby increasing focus on risk management. It is quantified under Basel-II and occurs throughout a bank’s business model. It refers to the challenges faced by a bank in quantifying, controlling and allocating regulatory capital to different Tasks that banks are required to do.
Operational risk is defined as a change in value caused by the fact that actual losses, failed internal process, people, system, or from external events such as legal risk. The operational risk is exists in every corporation and organization, no matter the size or construe of the institution. For ICBC, the operational risk is defined as more specific, “risk of loss resulting from insufficient or problematic internal process, employees and IT system or from external events, including legal risk”. (Page 78, 2013 ICBC annual report) Also, Legal risk and anti-money laundering should be consider and analysis in operational risk management. Moreover, country risk should be cover in the risk management even thought it is not including in the operational
Risk is a natural element of banking business. It is a condition that raises the chance of losses and uncertain potential events which could manipulate the success of the financial institutions. The uncertain future events could include disappointment of a borrower to pay back a credit, variation of foreign trade rates, fraud, non-compliance with laws and principles and other actions due to the failure of the bank (Khan & Ahmed, 2001; Meyer, 2000; Khalid & Amjad, 2012). As Khalid & Amjad (2012) noted commercial banks are in the risk business. In the process of providing financial services, they assume various kinds of financial risks.
Exposure to credit risk is managed in part by obtaining collateral and corporate and personal guarantees. Counterparty limits are established by the use of a credit classification system, which assigns each counterparty a risk rating. Risk ratings are subject to regular revision. Liquidity Risk Liquidity risk is the risk that the company is unable to meet its payment obligations associated with its financial liabilities when they hall due and to replace funds when they are withdrawn. GK’s liquidity management process, as carried out within the Group through the ALCOs and treasury departments includes: o Monitoring future cash flows and liquidity on a daily basis o Maintaining a portfolio of highly marketable and diverse assets that can easily be liquidated as protection against any unforeseen interruption to cash flow o Maintaining committed lines of credit Currency Risk Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.
Market Risk – it is basically the risk associated with fluctuations and changes in the dynamic markets 2. Counterparty Risk or Credit Risk – it is the risk that arises if one of the parties involved in the derivative trade defaults and fails to meet the contract obligations 3. Liquidity Risk - it is the risk that arises if the investors decide to close out the contract prior to maturity In order to avoid the risks, it becomes highly imperative that the derivatives market is properly regulated. The reasons below further strengthen the argument: 1. Warren Buffet quoted, “Derivatives are financial weapons of mass destruction, carrying dangers that are potentially lethal.” Derivatives played an important role in the beginning of the Financial Crises in 2007.