Strategic Risk and Exposure

Strategic Risk and Exposure

Strategic exposure refers to the risk that makes the foreign exchange rate movements unfavorable and will influence the present value of firm's future cash flows. This is also known as long-term transaction exposures in terms of financial jargon. (Operating / Strategic Exposure) A close watch on the financial statement i.e. The main source of financial information of a firm reveals a picture of the exposure of the company to the strategic risks. The magnitude to which the value of the company is responsive to the changes in the interest, exchange and commodity prices indicates its exposure to the financial risk. The variation in its profit and loss account; the expansion or erosion of the core business in terms of annual variation in net sales, stock turnover, variation in costs comparatively to the income in terms of gross profit margin, selling and administrative costs, general costs depict the exposure of firm to financial risk. Moreover the exposure to risk also is determined by the process of debt management by the firm revealed from interest cover, debt to equity ratio etc. (An Overview of risk Management-Lecture 2 Treasury Management)

A company strives to manage the strategic risks with a view to enhance the value of a company. The strategic exposure is the necessary condition however; the adequate condition is the risk management strategy that enhances the expected value of the company. All the strategic risks appear to be diversifiable risks and the share holders can have management over such risks by holding diversified portfolios. (An Overview of risk Management-Lecture 2 Treasury Management) The management of strategic risks involves establishment of strategic goals, choice of strategies and setting up of aligned goals cascading through the enterprise. Such framework for enterprise risk management is tailored to accomplish the goals of entities can conveniently be grouped under four groups such as -- (1) strategic: in terms of high objectives, commensuration to its mission objective; (2) operations: in terms of effective and efficient resource utilization; (3) reliable reporting; (4) compliance: complying with laws and rules which are applicable. Such categorization of entity goals facilitates concentration of the firm on different aspects of the enterprise risk management. (Enterprise Risk Management -- Integrated Framework)