Investment Risk Management - Essay Example

Laura and Rubia (2012) says that in a practical setting, typical risks faced by financial institutions include defaults on loans provided by the firm, losses on investment securities and failure of business undertakings on a supplementary party owing certain obligations to the affected party. In this case, it is acknowledgeable that financial companies face numerous risks in operations. Therefore, risk management involves developing appropriate measures to curb and minimize effects of these typical circumstances.

Laura and Rubia (2012) says that after developing appropriate measures, risk management moves into implementing and procedures meant to facilitate the realization of pre-determined risk management goals. In contemporary business environments, the financial industry faces substantial effects from volatility in micro-economic elements. This means that, economic trends play a significant role in either boosting or inflating portfolio, and investment securities held by a given company. This type of risk is largely inevitable, as micro-economic elements of a business environment depend on the specific region that a business organization operates.

In an event that America undergoes high inflation rates and a negative economic growth, then the financial industries operating within the US will feel the pinch of inflation. In this regard, financial institutions experience unprecedented risks during turbulent economic times. According to Allen (2012), it is inherent to acknowledge the fact that turbulence within an economic environment causes financial uncertainty; which requires intervention from risk management practices. Financial volatility and associated risks became pronounced with adoption of electronic trading in security markets.

In modern automated markets, threats from data and information theft features as one insecurity element facing the financial industry. Trends suggest that there is a potential risk of exposure to data breaches coupled with identity theft experienced by financial institutions. Allen (2012) agrees that despite risk trends suggesting an increase in security breaches, financial companies do not put enough measures to counteract data theft. In a practical sense, failure to address these risks presents huge risks and challenges to the financial industry.

In order to evaluate the effect of negligence in financial risk management, we will appraise the case of Lehman Brothers. In September 2008, Lehman Brothers, which is one of the most prestigious participants in the Wall Street market, admitted having filed for bankrupts amid negotiations with potential buyers. According to Teather, Treanor, & Wearden (2008), Lehman Brothers postulated that the protection move aimed at safeguarding its assets. However, the collapse of the huge financial company was a result of the credit crunch coupled with profound effects from sub-prime crisis.

Lehman was a victim of the credit crunch, which refers to a situation where lenders provided limited on no money to borrowers. In 2008, there was a significant economic recession across the world. As a result, lending financial institutions froze their money in order to minimize risks associated with the uncertain economy. According to Teather et al. (2008), Lehman Brothers could not borrow enough money to sustain its business operations; hence opted for a bankruptcy protection. Apart from