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Business and Financial Risk
There are many business and financial risks that are dealt with by companies each and every day. Among these are risks dealing with interest rates, foreign exchanges, credit, operations, and commodities. Organizations have to learn how to measure these risks, and they need to take global initiatives that they can use in financial risk management in order to ensure that they are as successful as possible. Protecting themselves financially takes work, but it has to be done if the company is to remain viable in the marketplace. In order to understand how to identify and address the major risks, a company needs skills and knowledge. Or, more appropriately, it needs people with skills and knowledge. The right people can make all the difference in an organization (Flyvbjerg, et al., 2003; Markowitz, 1952). Finding those who are trained to identify and understand risks allows the company to build a good team that will work together to handle any issues that arise with the business.
The interest rate risk is a part of doing business. Interest rates fluctuate, and how much interest a company is paying on its debt can make a big difference in the payments that company has. Conversely, how much interest the company is earning on its investments can also significantly affect the bottom line (Horcher, 2005). That is both good and bad, because a company has to ensure that it is paying out as little as possible and bringing in as much as possible so that its bottom line can be the best that can be seen. Companies that are not able to do that often struggle. Interest...
By getting fixed rates on debts when the rates are low, and getting fixed rates on assets when the rates are high, a company can provide itself with a better structure and a better way to move forward toward financial success (McNeil, et al., 2005).
Foreign exchange also produces a risk to companies. When a company trades with other companies in its local area there is not much risk. The currency and local regulations are the same for both companies. However, when companies start trading with other companies in other countries, there are more issues to be faced. The regulations that are seen from one country to the next can be quite different, and when a company fails to adequately address that the company can end up owing more money than expected in tariffs, taxes, and fines (Flyvbjerg, et al., 2003). That can cause the company to lose out instead of making the money it had hoped to see. The exchange rate of currency from one country to the next must also be taken into account so that a company makes sound decisions regarding the risk of foreign exchange.
Buying on credit is something most companies do, just like most people do. There is nothing inherently wrong with using credit, but it has to be used wisely. The company must clearly understand the terms of the credit, including the interest rate, the monthly payment, the number of payments, and the options it has should it not be able to repay the credit as originally agreed (McNeil, et al., 2005). If the company simply signs on…
References
Flyvbjerg, B., Bruzelius, N. & Rothengatter, W. (2003). Megaprojects and Risk: An Anatomy of Ambition. NY: Cambridge University Press.
Horcher, K.A. (2005). Essentials of financial risk management. NY: John Wiley and Sons.
Markowitz, H.M. (1952). Portfolio Selection. The Journal of Finance 7(1): 77 -- 91.
McNeil, A.J., Frey, R., & Embrechts, P. (2005). Quantitative risk management: concepts, techniques and tools. NY: Princeton University Press.
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