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Risk management : three cases

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  1. Introduciton
  2. Case 1: Firm is a large multinational organization with operations in several countries
  3. Case 2: Firm is a large, regional bank. In the past, the bank mainly conducted business in its geographic region.
  4. Case 3: Firm 3 is a large commercial bank. The bank has been experiencing high error rates in its processing of trades in bonds and currencies.

Firm 1 is a large multinational organization with operations in several countries. The company's industry is currently experiencing an economic downturn. While the firm is currently in good shape, it wishes to avoid bad news as it is concerned about further economic downturns. The firm owns a variety of bonds in its investment portfolio and is thus not too worried about market risk. If the bonds were to decline in value due to credit events, the firm would experience losses it would rather avoid. What approaches or strategies could you recommend to mitigate this risk? Firm 2 is a large, regional bank. In the past, the bank mainly conducted business in its geographic region. The senior management recently decided to expand its business in other countries too. There are two general strategies driving this decision. First, the bank plans to expand the investment portfolio and buy sovereign bonds. These bonds are expected to be from emerging market countries and denominated in the currency of the issuer. Second, the bank will also extend loans to companies in other countries that may or may not be denominated in other currencies. The bank has traded foreign currency for its clients, but always on an agency basis. What would you recommend to mitigate the potential credit risk? Firm 3 is a large commercial bank. The bank has been experiencing high error rates in its processing of trades in bonds and currencies. This high failure rate is causing it to lose some clients due to the high cost of fixing errors. How would you go about assessing the situation and recommending improvements to the settlement process?

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