RISK MANAGEMENT

Risk Management



Risk Management

Task 1: Risk management impact on business

Today's companies are facing a vast variety of risks in almost every aspect of their economic activities on a daily basis, which require to be carefully managed and tended to in order tosecure the companies' future existence and profitability. In the past few decades, however, onerisk in particular, and its management, have been and continue to be of major concern to the majorityof enterprises - namely, foreign exchange rate risk. The collapse of the fixed exchange ratesregimes in the 1970's and the followed adoption of floating exchange rates, as well as the steadilyintensifying degree of globalization in world's economy have significantly exacerbated the importanceof managing and minimizing the exchange rate risks.

The gradual reduction of trade restrictionssuch as tariffs and quotas, the internationalization of modern business and the rapid changein the technology of money transfers are just few of the factors that contributed to the rapidgrowth of world trade.The bigger world market and its opportunities that opened for the companies came at thecost of greater uncertainty and risks. As firms “went international” and spread their economic activityover and beyond national borders, cash denominated in different currencies started flowingin. This raised the issue of how companies should manage the increased uncertainty and avoid orminimize the potential losses associated with movements in the exchange rates of these currencies.As such movements affect the costs of inputs, outputs and substitute goods, currency risk isborne by not only companies involved in international trade, but also by domestic non-exportingones. It is rather transferred through the change in prices charged by suppliers, for example, thanborne directly. However, the result is change in competitiveness, which depends on the direction of movements in exchange rates.

Foreign exchange rates affect every walk of life, not just financial markets. Exchange rate movement can be significant for companies engaged in international trade, exposed to revenues and costs in foreign currency, or competing with foreign firms.The result was what began as turmoil in the currency market will have a serious impact on inflation, employment, investment and economic growth. Many wonder how one can live with a floating currency regime. Some are concerned with what the foreign exchange rate fundamentally should be. Since the researches in this area is vast and involves both theoretical as well as empirical investigations, any attempt to survey the exchange rate theory in its totality would be impossible.

The theory of rational expectations has been developed in the year 1960 in economy, especially in macroeconomics. It is used in the construction of economic models to represent the behavior of economic agents. The theory of rational expectations is an assumption of economics that states that the predictions about the future value of economically relevant variables by agents are not systematically wrong and that the errors are random. The expectations of workers, consumers and businesses about future economic conditions are an essential part of the model.

The principle of rational behavior of economic agents is older and has been introduced with regard ...