The document discusses corporate risk management. It defines risk as events that can damage a company's income and reputation. Risk is inherent in all businesses and managing it is important. The document outlines the risk management process, which includes determining objectives, identifying risks, evaluating risks, developing policies and strategies, implementing policies, and reviewing effectiveness. It also discusses sources of risk like interest rate risk, exchange risk, and business risk. Risk management techniques can be internal, involving day-to-day operations, or external, involving financial contracts with other entities. Guidelines for effective risk management include using flexible strategies and bringing risk to an optimal level for the company.

1. Introduction to Concepts
of
Corporate Risk
Management
By
Shravan Bhumkar
(KH08JUNMBA100)
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar

2. What is Risk ?
• “Risk is an event or injury that can cause damage to an institution`s
income and/or reputation”.
• “It is like energy that can not be crated nor destroyed but only can be passed
on or managed”.
• “There is direct relationship between risk and reward and the quest for
profit maximization has given rise to accelerated risk taking for enhanced
rewards”.
• “Whatever be the type of risk, impact is primarily financial. Ultimately risk
manifest in the form of loss of income and reputation”.
Source : “Theory and practice of treasury and risk management in banks”- IIBF
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar

3. What is Risk ?
• Risk is part of any business`s lexicon and understanding and subsequently
managing it is the most important concern.
• The risk is inherent in the business.
• Given the importance of risk management, it is no wonder that it is today
receiving scrutiny from the world`s top most organizations, banks, financial
institutions, regulators , governments and so on.
• Organizations and institutions put tangible assets (such as funds, technology,
processes and people) and intangible assets (such as reputation, brand and
information) at risk to achieve their objective.
• Whether the organizations are for profit or not for profit the task of
management is to manage these risks in the uncertain environment.
Source : “Theory and practice of treasury and risk management in banks”- IIBF
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar

4. Organizational management
has
thus become
synonymous with
risk management
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar

5. Sources of risk
• Interest rate risk
Interest rate risk is the risk of an adverse effect of interest rate movements on a
firm`s profit or balance sheet. Interest rates affect a firm in two ways by affecting
the profits and by affecting the value of its assets or liabilities.
• Exchange risk
Exchange risk is a possibility of adverse effect on the value of firm`s assets,
liabilities or income, as a result of exchange rate movements.
• Default risk
It is the risk of non-recovery of sums due to from outsiders, which may arise
either due to their inability to pay or un-willingness to do so.
• Liquidity risk
Liquidity risk refers to the risk of possible bankruptcy arising due to the inability
of firm to meet its financial obligations.
Source : A book on “Strategic financial management” by ICFAI University
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar

6. Sources of risk
• Business risk
It is the risk faced by business from its external and internal environment.
Internal factors like labour strike, death of key personnel, machinery break-down
etc. External factors like government policy, changes in customer preference etc
• Financial risk
It refers to bankruptcy arising from possibility of firm not being able to repay its
debts on time. Higher the debt-equity ratio of firm, higher the financial risk faced
by it. Liquidity risk and wrong capital structure are the prime reasons for
financial risk .
• Market risk
It is the risk of value of a firm`s investments going down as a result of market
movements. It also referred as price risk.
• Marketability risk
This is the risk of the assets of a firm not being readily marketable.
Source : A book on “Strategic financial management” by ICFAI University
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar

7. The changing form of risk
• We all know is risk is associated with every business activity. In a repressed
financial system risk is not apparent.
• The earlier ethos inspect/detect/react have been substituted with new
concepts like anticipate/prevent/monitor/mitigate.
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar

8. Risk management process
I. Determining objectives
• It is a first step, may be profits, or to develop competitive advantage.
• It is to be decided by management.
II. Identifying risks
• Each corporate needs to identify the possible sources of risk and the kinds of risk
faced by it .
III. Risk evaluation
• Once the risk is identified, they need to be evaluated for ascertaining their
significance.
• The significance depend upon the size of loss that it result in, and the probability of
the occurrence of such loss.
Source : A book on “Strategic financial management” by ICFAI University
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar

9. Risk management process
IV. Development of policy
• Based on tolerance level of the firm, the risk management policy needs to
developed.
• The time frame of policy should be comparatively long, so that the policy is
relatively stable.
V. Development of strategy
• The tenure of a strategy is shorter than policy it needs to factor in various
parameters that keep changing.
• A strategy is essentially an action plan, which specifies the tools, techniques and
instruments that can be used to manage these risks.
• For example Derivatives
Source : A book on “Strategic financial management” by ICFAI University
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar

10. Risk management process
VI. Implementation
• This is the operational part of risk management
• It is finding the best deal in case of risk transfer, providing for contingencies
in case risk retention, designing and implementing risk control programs, etc.
VII. Review
• The function of risk management needs to be reviewed periodically.
• Monitor effectiveness of the decision taken previously.
Source : A book on “Strategic financial management” by ICFAI University
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar

11. Risk management techniques
Two kinds of techniques used for management of various
categories of risk
1. Internal techniques are those that are a part of the
day-to-day operations of the firm.
2. External risk are those that require the company enter
into some kind of financial contract with a market
entity
Source : A book on “Strategic financial management” by ICFAI University
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar

12. Risk management techniques
• Management of business risk
Some of business risks are not manageable, i.e. they
have to be borne
Operational risks can be managed by building
flexibility into operations
• Asset-liability management
Marshall & Bansal describes ALM as “ an effort to
minimize exposure to price risk by holding the
appropriate combination of assets and liabilities so as
to meet the firm`s objective and simultaneously
minimizing the firm`s risk”
To manage interest rate risk and exchange risk
Source : A book on “Strategic financial management” by ICFAI University
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar

13. Guidelines for risk management
• Common goal of risk management and financial
management
• To create shareholder wealth
• To generate Net present value
• Proper mix of risk management techniques
• No risk management is fool proof or complete in itself
• Employs most optimum mix of risk control, risk
prevention, risk transfer and risk retention
• Proactive risk management
• Number of uncertainties involved in financial
markets
• Continuous changes in interest rate, exchange rates,
commodity prices, economic variables and external
environment is a reality
• Risk management cannot be done after the
happening of an event, it has to be done in its
anticipation.
Source : A book on “Strategic financial management” by ICFAI University
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar

14. Guidelines for risk management
• Flexibility
• Risk management strategies should not be too rigid
• They should be flexible enough to allow risk manager
to make most appropriate decision in according to the
circumstances
• Bringing risk to the optimal level
• The maintenance of risk at the level of optimal (The
risk bearing capacity of the firm)
• Firm should not be exposed to risks which may results
in its liquidation
• Risk substitution
• In general, risk management techniques do not
eliminate the risk completely but substitute it by
another kind of risk
Source : A book on “Strategic financial management” by ICFAI University
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar

15. Thank you.
Financial & Cost Accounting Batch- XIII (B)
Prof. Hardic Mehta Shravan Bhumkar