Objectives of Risk Analysis and Techniques of Analysis - Assignment Example

Running Head: Objectives of risk analysis and techniques of analysis Objectives of risk analysis and techniques of analysis Customer’s Name Customer’s Course: Tutor’s Name: 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). Among the techniques used in risk analyses are: one, contingency analysis. The presence of a comprehensive structure that contains contingency procedures can be very vital in preventing risks or in some way minimize the possible outcomes. Presence of contingency arrangement will aim at preserving the property value (monetary) in the troubled institutions (Federica, 2011). It eliminates peril which is dangerous as the owners and also the interested stakeholders in the individual undertaking may not know how they can be rescued. The analysis approach comes up with applicable and better proceeds to the crisis victims rather than other institutions which are unsuccessful. The approach simplifies for the administration to close down the non-workable institutions and systems. The method does attempt to relook the organization in question ability to withstand operations in complicated trading periods. In the current business environment, most of the undertakings collapse within the first one or two years of operations because of the firm lacking adequate base in terms of capital. This is the same as saying that such undertaking does not have stable bank account in monetary terms for the firm to be able to engage in the day to day operations (Federica, 2011). Such firms may encounter financial constraints which do arise from the nationwide problems in the economy, end user worries or illpress.Hence when one evaluates the operational costs and comes up with the required contingency plans that will take the firm for the next six or so months with no present value sources, that is when contingency analysis is achievement. The second most widely used technique is credit analysis. This is the potential that a borrower may not be in a position to meet the outlined obligations agreed during the credit transactions. The goal of each and every management involved in the credit management is to maintain parameters accepted by taking care of the credit risk exposure. Financial institutions need to take care of the credit risk that can be in the whole of the portfolio and also the risk in the individual credit transactions. Effective management of credit risk is critical in approaching the risk management and is also essential for the business to succeed in the long term. Performing the risk analysis is essential as it will assist the firm in avoiding some of the related risks and also assist in attracting more investment from other investors (Hollmann, 2006). The third technique used is where a firm works out the loss incurred when a catastrophic tragedy occurs. This is a type of psychoanalysis. The administration should think in terms of the possibility of hurricanes harm, flooding, terrorist hits and other catastrophic events which are usually fatal. The firm comes up with probability of whether the calamities may happen or not. More over the firms should consider also the necessities like the workers loss or injury, evidence destruction, requirements downtime and also time wastage (Olmo, 2011). This will help in maintaining the business confidence; boost the enterprise proceeds and workers morale. The fourth one is Forecasting. Forecasting is a strategic plan made on grounds of existing proceeds model and predicting revenue streams. By undertaking this, you change common variables that are real. For instance, a firm supposed take into consideration what the final consumer stand will be in one year to comprehend if the firm requires to amplify or reduce production. A firm may come up with growth rate based on continuous swell in demand. While prediction is done in piece to boost business yield, it is a vital risk analysis method that assists businesses cut back if essential previous to the financial hit .These predictions are frequently done by experts who possess appropriate expatriate knowledge. They habitually come up with adoptable figures which are vital for firms practice to the peril. This is applicable (Olmo, 2011). Risk analysis is very vital in the many organizations that are operating in the current economic situation. A firm that has been able to carry out the risk analysis will usually be ever ready with the requirement to overcome a peril that may occur along the way. The firm will apply the correct strategy in such a situation to for the business to survive in the environment. Risks are what deter the firm from further investment and if taken care of they give the firm a room to invest widely in the business environment. The enterprise will in such a case account for profits and business operating to the maximum without fearing the presence of any form of hindrance (Fantazzini, 2009).All business would like to survive in an environment with the least or no risk to guarantee the achievement of the firm’s goal and objective. Enterprises are required to have the correct systems and strategies put in place to assure the firm that it will at the end of the transaction yield what was intended and accounted for by the planning or planners of the firm. In order for a firm to achieve goals especially the ones operating globally, they are supposed to take caution of the risks that may arising when carrying out foreign exchange transactions as they may impact negatively on the firm proceeds (Olmo, 2011). References Andersson, M. & Holmgren, L. (2010). Non-industrial private forest owners' financial risk taking: Scandinavian Journal of Forest Research, pg 256-13. Armeanu, S. (2012). Using Quantitative Data Analysis Techniques for Bankruptcy Risk Estimation for Corporations. Theoretical & Applied Economics, vol.19 (1), pg.9 Blackwell, D. & Griffiths, B. (2007). Modern financial markets prices, yields, and risk analysis. Hoboken, N, Wiley. Fantazzini, D. (2009). Random B Survival Forests Models for SME Credit Risk Measurement. Methodology & Computing in Applied Probability, Vol.11 (1), pg 29-45. Federica T. (2011). Subjective measures of risk aversion, fixed costs, and portfolio choice. Journal of Economic Psychology, 32 (Financial Capability), 564-580. Hollmann, J. (2006). Total Cost Management Framework: An Integrated Approach to Portfolio Program, and Project Management. A Special Publication of AACE International – The Association for the Advancement of Cost Engineering. Retrieved from, http://www.qsrequin.com/Papers/TCMFramework_WebEdition.pdfhttp://www.qsrequin.com/Papers/TCMFramework_WebEdition.pdf, Retrieved on, 30th September, 2012. Kannadhasan, M. & Nandagol, R. (2010). Do Company-Specific Factors Influence the Extent of Usage of Risk Analysis Techniques in Strategic Investment Decisions? The IUP Journal of Financial Risk Management. 7(4), 55-72. Olmo, J. (2011). Early Detection Techniques for Market Risk Failure. Studies in Nonlinear Dynamics & Econometrics, vol. 15(4), pg. 1-53. Maxim, L. (1972). Financial risk analysis / [by] L. Daniel Maxim [and] Frank X. Cook, Jr. [New York]: American Management Association, [1972] Oikonomou, I. & Pavelin, S. (2012). The Impact of Corporate Social Performance on Financial Risk and Utility: A Longitudinal Analysis. Financial Management (Blackwell Publishing Limited), 41(1), 483-515. Yushkov, Y., Icitovic, N. Sheth, M., & Goldstein, M. J. (2012). identifying risk factors in renal allografts before transplant: machine-measured renal resistance and post-transplant allograft survival. Progress in Transplantation, vol. 22(2), pg. 175-182 Read More