Risk can be defined as the volatility of unexpected outcomes, generally the value of assets or liabilities of interest. Firms are exposed to various types of risks, which can be broadly classified into business and non-business risks.
Business risks are those, which the corporation willingly assumes to create a competitive advantage and add value for shareholders. Business or operating, risk pertains to the product market in which a firm operates and includes technological innovations, product design, and marketing. Operating leverage, involving the degree of fixed versus variable costs is also largely a choice variable. Judicious exposure to business risk is a Core competency of all business activity. Business activities are also subjected to macroeconomics risks, which result from economic cycles, or fluctuations in incomes and monetary policies.
Other risks, over which firms have no control, can be grouped into non-business risks. These include strategic risks, which result from fundamental shifts in the economic or political environment. Expropriation and nationalization also types of strategic risks. These risks are difficult to hedge, except by diversifying across business lines and countries. Financial risks are those related to possible losses in financial markets, such as losses dues to interest rate movement or defaults on financial obligations. Exposure to financial risks can be optimized carefully so that firms can concentrate on what they do best manage exposure to business risks.
[...] Scope of study The scope of the project is limited to the assessment of market risk of the company portfolio consisting of receivables, payables as well as treasury operations (Loans, advances and investments) 1. Since these items are subjected mostly to interest rate risk and forex risk, the project endeavors to assess the risk because of the movements in these variables. To quantify potential losses in simple terms chance of a loss exceeding million) To meet with approval from various regulatory bodies concerned with the risks faced by financial institutions One reason it is being used is because it is versatile. [...]
[...] Practical utility of such a model would however be contingent on the ability of the derivatives exchange / clearing corporation to make a margin call shortly before the market opens in Mumbai based on the market movement in New York (previous day close), Tokyo (same day close) and Hong Kong (same day morning session). Table Summary Statistics of Margins on Nifty Average Average Average Findings In this section, the actual portfolio for the company taken as on 17th of May is taken and then this portfolio is evaluated using market data since Apr '99 to determine VaR estimates with time horizon ranging from 1 day to 1 month and a confidence level of 95% and 99%. [...]
[...] Because of this linkage and since the repayment of loan is to be made in EUR, the company is subjected to both interest rate and Forex risk. The terms of the loan are stated in Exhibit below Terms of loan of EUR 400,000,000 for betapharma acquisition. Since the interest rate is reset every 3 months, the market value of the loan amount is same as the book value on the date of reset. Hence, the valuation of the loan on any date is done as follows: Where: P = Book value of the loan CP = Interest rate (Reset every 3 months M EUR Libor rate + 150 basis points) DR = Discount rate M EUR spot Libor rate + 150 basis points) D = Number of days from valuation date to next resettlement Z = Number of days between resettlements B = Interest basis (Taken 365 days) The Market value obtained is in EUR and to convert it to INR, it has to be multiplied with the EUR/INR exchange rate on the valuation date. [...]
[...] From the above, it is clear that because of volatility in Forex and Interest Rate, the Company run the risk of incurring a loss which can be a substantial portion of the portfolio value. This risk has become more pronounced in the recent years because of the large sum of long term debt that the Company has taken for Betapharma acquisition. From the above discussion, it is evident that the Company needs to manage its risk profile so as to restrict unduly exposure to market movement. [...]
[...] However, it also stands to lose from adverse market movement, in case the exchange rate is lower, say In that case, the Company will receive only 450 Crores and hence Rs Crores lower than what they would have got in case exchange rate was Hence the company is subjected to Forex risk by the very nature of its business. Similarly, Exhibit 2 shows the volatility in Libor rate, both USD and EUR, since 1999. As can be seen, the volatility in interest rate is even higher than in forex. [...]
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