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Finance and Accounting : financial markets and institutions - Essay Example
Author : felicityblanda
Finance & Accounting
Pages 11 (2761 words)
Every organization irrespective of whatever business they undertake has to take some sort of risk. Risk can be classified into two categories systematic and unsystematic. Systematic risks are those which cannot be controlled by the organization alone like change in interest rate, inflation, recession etc. …
Unsystematic risk can be controlled by the organization like management problems, industrial relations, business or financial or default risk. Banking organizations also have to face these risks. These risks must be managed well in order to grow and sustain in the market. If these risks are not managed properly then banks can collapse like Lehman Brothers collapsed in the year 2008.
Lehman Brothers was one of the largest investment banks in USA. It was established in 1850. During the initial years it operated in the field of cotton trading. Later, it started the business of investment banking. It faced many financial crisis during its long tenure like the great depression in 1930’s but it collapsed and became bankrupt during the financial crisis which occurred due to subprime crisis. The collapse of the Lehman Brothers is the biggest example of inefficient handling of the financial risk.
Financial risk can be defined as the risk which arises due to the use of debt in the capital structure of the organization. This risk happens due to increase of financial leverage. If the company uses debt in the capital structure then it is bound to make fixed payments to the creditors. Compulsory payment of fixed charges in turn lowers the earning per share (Kevin, 2006, p.58). The EPS of a company varies due to the financial risk. ...