Risk Management Diversified Worldwide Industries

Risk Management

Diversified Worldwide Industries faces a number of different risk types. Operating in a number of different businesses in a number of different countries helps to diversify away some of the risk, but the organization remains exposed to a significant amount of risk in each of its businesses. This paper will outline some of the risks faced in DWI's ongoing activities and how the organization can mitigate some of those risks.

DWI faces significant political risk. Several of the company's businesses are in sensitive industries (water treatment, gambling, refining, investments, alcohol) that are subject to heavy regulation. These and others (telecommunication, media) are occasionally subject to nationalization. Governments in each jurisdiction can make decisions that adversely affect our profitability. There are several hedges available for political risk. One is to incorporate a local partner in the business. This aligns your success with the success of local investors and employees, giving the foreign government incentive to allow you a normal course of business.

In some cases, insurance can be taken out against political risk, in particular with regards to single project investments. This strategy is also done in conjunction with debt financing - the debt is insured so the company does not lose if the project is nationalized or otherwise compromised through adverse political action.

DWI also faces significant technological risk. Technological change drives many of the industries in which we operate. Shifts in technology can thus represent shifts in competitive advantage. Perhaps the best hedge against technological risk is to assume a technological leadership position. This strategy requires significant investment, but becoming the driver of technological change would allow DWI to control this risk.

Another significant form of risk is exchange rate risk. Because DWI operates in many countries, we are exposed to both transaction and translation risk from our foreign exchange transactions and business conducted in foreign currencies. Several of DWI's businesses are cyclical, with strong correlations to the economy. The result of this is a significant amount of exchange rate risk. Transaction risk can be hedged in the financial markets. Numerous products are available, including currency or exchange rate swaps, forward contracts, futures and options. Another option, which covers some of the translation risk as well, is to index costs and revenues to the exchange rate. Translation risk is more difficult to address, but there are methods. DWI can build an operational hedge, whereby inflows from a particular country are matched by outflows. Other tactics, such as using an average exchange rate for the entire income statement or balance sheet, can mitigate the risk but not eliminate it.