The paper 'Real vs. Financial Options in the Risk Management Strategy" is an outstanding example of finance and accounting coursework. In any financial investment, financial risks are involved. Therefore, some degree of risk must be considered when making a financial decision, especially when financial investments are made. Financial risk management refers to the practices that enable a firm to optimize how it takes financial risk. Some of the elements involved in financial risk management include determining how the company will monitor risk operations or activities. The following paper intends to first focus types of risks as described in Triantis.
Secondly, an analysis of the risk management strategies for the early‐stage biotechnology investment by Wahoo Genomics has been provided. However, in order to minimize future financial risks involved in the project, the paper recommends the use of debt and equity instruments. Identifying the Type of Risks Business risks are some of the core components that any company or organization should take into consideration to avoid the backlash of business activities or operations. Commodity price, fluctuation of interest rates and currency of a country are critical elements when profiling risks of a business initiative (Triantis 2000).
However, there is a wide range of other risks that should be taken into account. The following section intends to analysis technological, economic, and financial, performance, and legal or regulatory risks. Technological risks mostly arise in the processes of research and development as well as operational stages in the value chain of a firm (Triantis 2000). The continued increase in the dependence on the technological progress in many industries has widened the type of risks encountered as well. The profitability of any organization including those dealing in the high-tech and pharmaceutical industries is determined by how risks are controlled and managed in the processes of research and development.
It is important to note that companies should ensure that the kind of technology used is up to date in order to avoid continued breakdowns. However, technological risks also arise if new technologies used by a firm are not well or fully integrated into the firm’ s operations (Triantis 2000). The net result is that the delivery of services and the outcome is heavily affected.
Using old systems means that research and development processes s will take time and the organization might be forced to use more money in the end. Some of the expected risks as a result of technical failure include accidents, fires, major breakdowns, and force majeure risks such as floods and earthquakes. Further, the defective output can as well be experienced by a firm, leading to product liability suits (Triantis 2000). The valuation of the early‐stage biotechnology investment is as well dependent on the cost of technology used in the research and development. Economic risks vary from one aspect to another.
There a couple of components that include the economic position of a firm or an organization(Triantis 2000). The change of currency is one of the determinant factors that affect the cost of production and the value of revenue. The company needs to take into consideration the fluctuating of the cost of production that is also included by several elements. Labor and cost of the material determine the overall cost of production and the net price of products and services in the market.
Consequently, the price tagged to the product is dependent upon the production cost (Triantis 2000). On the other hand, the cost of a product determines the demand level, which influences the revenues of a firm. Despite the fact that general microeconomic conditions will significantly affect these variables, such as the gross domestic product of a country, the competitive nature of a firm and the market environment also determine the kind of economic risks to be exposed to. However, a firm can apply of Michael Porter’ s five forces model that offers a framework of examining the strategies of increasing the profit margin in a competitive environment (Triantis 2000).
The model is also instrumental in pinpointing the genesis of revenue and expense risks. The application of economic factors such as labor, cost of services and materials used should be factored in the valuation process. However, the application of the risk-free discount rate and risk-neutral probabilities to backdate the cost of the investment made is instrumental in determining the value of the investment as of 2007.
Hull, J. (2012). Risk management and financial institutions. Hoboken, N.J., John Wiley & Sons.
Shockley Jr. ( 2002).The Option Value Of An Early‐Stage Biotechnology Investment , Journal of Applied Corporate Finance. Volume 15, Issue 2, December 2002, Pages: 44–55
Triantis, J. (2000). Real Options and Corporate Risk Management, Journal of Applied Corporate Finance. Volume 13, Issue 2, Summer 2000, Pages: 64–73.