Chapter 50
FINANCIAL MANAGEMENT : Managing financial risks

Managing risk inside a company has become a hot issue: regulations are much stricter, investors ask for more transparency and top management spends more time on it.

Risk management requires identification of risks, setting up controls, measuring the residual risk and lastly choosing a hedging strategy.

Risk is characterised by frequency and intensity.

We can identify five major risks:

Market risks are accurately measured with the notion of position and value at risk (VaR). Liquidity is measured by comparing debt repayment and expected cash receipts. Techniques for measuring other risks are still in their infancy.

When confronted with risk, a company can:

The same types of product (forward buying, put options, swaps, etc.) have been developed to cover the five different risks and are traded either on the OTC markets or on stock exchanges. On the OTC market, the company can find products that are perfectly suited to its needs, but there is the counterparty risk of the third party that provides the hedging. This problem is eliminated on the futures and options markets, although the price paid is reduced flexibility in tailoring products to companies' needs.