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Systematic and Unsystematic Risks - Essay Example

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Systematic and Unsystematic Risks

This makes multi-national corporations safer compared to their domestic counterparts. Normally, systematic risk assessment are important for listed companies to effectively price the equities, determining the cost of capital and effective evaluation of projects. However, internationalization also poses some distinct systematic risks to multi-national corporations. Some of these distinct risks are - exposure to currency fluctuations in multiple countries, exposure to political risks pertaining to multiple governments, exposure to reduction in ability of monitoring managers in multiple countries, increased chances of asymmetric & inaccurate localized information thus resulting in wrong investment decisions, etc. Internationalizing investment portfolios also increases the exposure to unsystematic risks - like competitor activity in a foreign country, manager's foul play in another country where the company's monitoring system is weak, etc. Hence, it is important for the organization to have sound global knowledge base & threat database for risk management.
Organization structures with distributed power often increases the exposure to both systematic and non-systematic risks. This is the reason that Chatterjee and Lubatkin et al (1992. pp155) felt that vertical mergers reduces the exposure to both systematic and non-systematic risks. They also observed that vertically integrated companies are able to manage lower cost of capitals thus enabling the integrated company to participate in a wider set of opportunities. Hence, multi-national companies with centralized corporate governance and risk management possess lesser exposure to both systematic and unsystematic risks compared to companies having distributed (country specific) risk management & power structures.
Cornell (1999. pp198-199) presented a correlation between risk duration and capital budgeting stating that long term projects may be having higher risks if the variations in cash flow is stochastic in nature. Such projects make estimations of discounted cash flow quite difficult and hence the author recommended discounting of long term projects at higher rates. This is the reason that investors normally prefer to invest in short term projects guaranteeing quick returns.


Discussions on Risk Management in Deloitte

The above analysis of risk exposures of multi-national corporations has been carried out to build analogy with Deloitte in which the author works as partner in Croatia. Deloitte is the largest and oldest multi-national corporation in risk advisory and audit services. Deloitte operates in multiple countries across the world through a tightly controlled "Franchisee" model in which local entrepreneurs are allowed to manage local business based on local market strategies but the risk management, code of conduct and operating methodology is largely governed globally by centralized power centers. The organization possesses a global knowledge base for risk management and allows diversification of portfolios in multiple coun ...Show more

Summary

In this short essay, the author presents the brief on identification, measurement and investments in mitigation of systematic & unsystematic risks. The author has presented this subject in the context of Deloitte. In the end, the author has presented some discussion points.
Author : hchamplin
Systematic and Unsystematic Risks essay example
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