FINANCIAL RISK MANAGEMENT
The financial executives appreciate the new and imaginative ways to minimize exposure to the volatility of foreign exchange, commodity prices, interest rates and security prices.
The financial industry is offering financial hedging products, such as currency swaps, interest rate swaps and options.
Makers to discuss the principles of accounting standards / measurement and reporting standards are appropriate for financial products. Financial reporting so that companies do better internationally.
All of this is to reduce the risk of the use of instruments that are often closed. Hence the term risk management study to be important (see Exhibit 11-1).
• The Fundamental Risk Management
The main objective of financial risk management is to minimize the potential loss arising from unexpected changes in currency rates, credit, commodities, and equities.
For that we need knowledge of:
A. Market risk
2. Liquidity risk
arises because not all the financial risk management products can be traded freely.
A. Market discontinuities
refers to the risk that the market does not always lead to changes in prices in last
A. Credit risk
the possibility that the other side of risk management in the contract can not meet its obligations.
A. Regulatory risk
risks arising from public authorities banned the use of a financial product for a particular
A. Tax risk
the risk that certain hedging transactions can not obtain the desired tax treatment.
A. Risk accounting
chance that a hedging transaction can not be recorded as part of the transaction hedged about.
• Why Manage Financial Risk?
Controlling financial risk can enhance shareholder value, as investors who prefers fund managers
are able to identify and manage market risks.
Stability of cash flow can minimize earnings surprises, so that cashflow expectations rise.
Stability of income to reduce the risk of default and bankruptcy.
Exposure to active management makes the company can concentrate on key business risks. For
example, manufacturing companies can be protected from the risk of interest rate and currency
by concentrating on the production and marketing.
Lenders (creditors), employees and customers could also benefit from exposure management.
Creditors lower risk tolerance than stockholders
Employee pensions and benefits through better
Customers limit the risks faced by consumers
• Role of Accounting
– Identification of Market Risk
– Quantifying the Balancing
– Risk Management at the World Under Floating Exchange Rates
- Anticipation of exchange rate movements
- Exchange rate risk measurement
- The design of protection strategies
- Preparation of internal risk management control systems
– Management of Risk Potential
- Translational potential risks
- Potential risk of the transaction
- Potential risks of economic vs. accounting
- Protection Strategy
1. Balance Sheet Hedging
2. Operational Hedging
3. Contractual Hedging
• Role of Accounting (continued)
Accounting for Hedging Products
A. Forward Foreign Currency Contracts
2. Future of Finance
3. Currency Options
4. Currency Swap
5. Accounting Treatment
6. Practice Issues
Financial Risk Management
1. Foreign currency (Foreign Currency)
2. The value of risk (Value at Risk)