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Corporate Risk Management - Assignment Example
Finance & Accounting
Pages 9 (2259 words)
Name: University: Tutor: Course: Date: Corporate Risk Management Financial risk management is a very sensitive issue for many firms in a modern market environment. While insurance is the de facto method of hedging financial risk in business, it can be very costly and this requires the business to have alternatives to hedge its financial risk (Frank, 89)…
Derivatives Derivatives refer to a method where one party owning a risk transfers the risk to another 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 management to the business over using insurance is that the business is not obliged to pay any insurance premiums and therefore the only 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 for derivatives has grown significantly for some time, perhaps because of the increasing risks in the global business environment. Globalisation and technology have 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 have 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. ...