3rd January, 2013.Risk analysis requires to be carried out in a firm in order to ensure that the firm is always ready for the risk that might occur during the firm’s day to day activities. Prior to the undertaking of the risk management programme, the enterprise requires outlining various objectives that will be used during the risk analysis process. These include both financial and protective objectives. The first financial objective is to undertake the required steps to do away with the losses that do come about due to exposing the available income.
Administration in many cases do undertake hedging activities that benefits the both shareholders and the management. Agency theory which is a field of finance does argue that the management is usually more exposed to risks than the shareholders. The management thereby has the responsibility to make sure that the financial risks are clearly dealt with (Armeanu, 2012). The management of a firm may in some cases think that it may be criticized so much due to incurring from the oversea exchanges done by the firm as seen in the monetary statements.
The Criticizers think that the firm should incur more in trying to eradicate those losses arising from the oversea exchange. The market experts who are efficient do have the believe that sharp investor can be able to see through the ‘ accounting veil’ hence have already put into consideration the effect on foreign exchange when one is doing market valuation for the firm (Armeanu, 2012). Once such risks are eliminated in the forecasted cash flows, the capability of the particular firm can be set up hence the firm is in position to undertake certain given type of investments.
These investments are possible due to the presence of accurate forecasted figures of cashflows. When the risk is mitigated in the cash flows of the future periods; it eliminates the likelihood that cash flows of a firm will fall below minimum. A firm in such a case should come up with enough cash flows to service its own debts in order for the firm to remain in existence. Carrying out hedging does away the likelihood that the firm’s cash flow will fall to the level below minimum (Blackwell & Griffiths 2010). The second financial objective is to fund the global operations at the minimum cost after tax.
When data analysis is done, it is usually done in the global offices which might be many in number. This data usually consists of reviews which are thorough and done on a set of holdings. It involves subunit and sector concentrations, the factor analysis and also key rating. A firm in such a case employs risk systems which are comprehensive enough to relook at the concentration of the portfolio and also the various areas experience, securities, variation present in the income curve.
Risk analysis is therefore vital in determining those costs that will be incurred in and when funding the world wide operations (Blackwell & Griffiths 2010). Protectionist objectives may include making the risk of loss minimal possible. It is obvious that running the business in a state that is demanding is pretty hard. One being part of the enterprise probably comes across encounters in the day to day business operations while trying to achieve and make the customers satisfied.
The last and final thing that one is likely to care about is the difficult situation that arises In case of occurrence of a sudden loss, especially if the loss could have been avoided. The firm in such situation will only engage in those activities which have the risks that can be mitigated. This removes the risk brought about by loss. The firm usually makes calculative moves in order to avoid such risks. Administration of the firm should understand that can even though there are risks that can be protected by and when a firm is insured, there are usually certain risks which are beyond compensation (Fantazzini, 2009).