Questions for Risk Management - Assignment Example

Exam questions for risk management Contents Answer 3 Identification of Risk 3 Assessing risk 5 Evaluating risk 5 Managing risk 5 Implementation andmonitoring of Risk 6 Answer 2 6 For small private firms 7 For large public firms 8 Major differences 9 Answer 1 The arrangements for dealing with each stage of the risk management cycle of Apple includes identification of risk, assessing the risk, evaluating the risk, managing the risk and implementation and monitoring of the risk. The risk that is faced by Apple Inc can be categorized into two broad levels such as at firm level and at industry level. Figure 1: Risk management process Identification of Risk At industry level, Apple Inc is subjected to following kinds of risks. Market risk: Apple is expanding and developing its business in video players market, portable digital music and in case of the mobile communication devices. But in case of market risk Apple is mainly exposed to two broad types of market risk such as the foreign exchange currency rate risk and interest rate risk. In case of the foreign exchange risk Apple is required to adjust its prices in the local market with the change in the exchange rate. Apple when it is expressed in terms of US dollar is negatively affected with the change in the exchange rate. The Fluctuation in the interest rate of Apple affects directly the cost, cash and securities that are related to hedging of foreign currency. Competition risk: The Company is engaged in carrying out business related to video player, personal computer, mobile communication, music player and other related services are very highly competitive in nature. For expanding and widening its business and gaining competitive advantages Apple is required to make expenditure for carrying out research and development. If Apple cannot adapt to the rapid technological changes and the services that are highly competitive in nature then the operating and financial condition of Apple will be affected adversely. Figure 2: Apple Inc. At firm level Apple is exposed to the following risk: Inventory risk: The shortage of the products and the ineffectiveness of the inventory of Apple have affected adversely the sales of Apple and as a result Apple has to face offset for several months. Credit risk: Apple has to face to face the credit risk in order to gain the advantages and sustain in the online store as Apple considers the online store as the most important approach for income. Assessing risk The product risk and reputation risk has been faced many times by Apple has to face the disappointment on the design of iPad from its customers. Apple therefore assesses its risk by focusing on the profit of its shareholders and experiences of its customers. If Apple is able to meet its strategies it will be able to attract its investors for investment and undertake sustainable development of Apple Inc. Evaluating risk The Company evaluated its risk that the company is exposed to the changes in the interest rates that is mainly related to the investment portfolio of the company. The company is facing the risk in investing in high rated securities and the investment policy that is adopted by the company is exposed to credit risk. Therefore the company mainly used the combination of the external and the internal management for executing the investment strategy for achieving the investment objectives of the company. The company is required to adjust according to the local currency product pricing to avoid the risk due to the competitive pressures in the market when there remarkable volatility in the exchange rates of the foreign currency. Managing risk Apple has decreased the change in the rate of interest rate risk The foreign currency risk of Apple mainly signifies the importance of the change in the exchange rate . In order to reduce the competition risk Apple has established its connection with different software and products for sharing and controlling and also developing online customer experiences through the contents and applications. Apple has adopted several financial tools for reducing the risk such as the option contract risk and the foreign currency forward and providing a hedge towards the exposure of fluctuations in the exchange rates. Apple has adopted strategy for reducing the credit risk. This strategy will provide guarantee for the sustainable income of Apple in long term. For controlling or managing the inventory risk is applying the inventory method for managing the losses of inventory and providing more efficient and effective distribution of inventory. Implementation and monitoring of Risk The company has applied sensitivity analysis that is used for valuing the risk for assessing and determining the influence of fluctuations in the exchange rate. The company has adopted a policy that requires the minimization of the potential risk and the reduction of principal loss. The gain and the loss that will be incurred by the company in future will be determined by the derivative position and investment portfolio of the company. Answer 2 The main stages of the risk management cycle by the small private firms are the strategic and the financial risk. In case of the financial risk the cash flow is a matter of concern for the smaller firms. The small firms are required to consider or design the path for the generation of money in order to pay off to its employees and make investment in the market for its penetration, growth and development. The main key towards the strategic risk includes the economic conditions and the competition. Figure 3: Entrepreneurship Risk management cycle The small firms are required to identify and evaluate the risk by identifying the need of the business and developing proper insurance coverage for safeguarding and protecting the company. For small private firms The small firms are also required to assess and manage the risk which includes understanding the risk process and then formalizing the process of risk management. It is required to mitigate the risk which will provide an improvement in the business. The probation period of the company is required to be analyzed for determining the probation period of the company as this is considered to be the best period for mitigation of risk. Implementation or monitoring of the risk this includes that the small business owners are required to formalize proper and appropriate risk management process. After analyzing the risk it is required to consider all types of risk that affects the company and then planning the required steps that is to be adopted for mitigating and reducing the risk that is mainly related or associated with reducing the risk related to cost such as the payment of insurance premium. The proper and well risk management process is mainly used for protecting and safeguarding the reputation of the company and helping it to plan for its contingencies which will make the company more profitable and will develop the longevity of the company. The key for reducing and minimization of the risk is forecasting and preparing for the contingencies. The owner of the small business is required to keep track of the performance of the business. For large public firms Risk management is considered as an important and vital process in case of the large public limited companies. The efficient and the effective management of the risk are results in controlling the environment that are required for the proper corporate governance. The first step is identification of the risk that is identifying the type of risk that the company is exposed to financial reporting risk, legal risk, environmental risk and the IT risk. It is required to identify the appetite of the risk, flaw or the mistake in prioritization of the risk and misallocation of resources. Then the company is required to evaluate the risk that is communicating the risk. The company is required to clearly understand the type of risk and evaluate it and establish parameters what the company wants to achieve through the evaluation of risk. The next step is assessing the risk which includes the assessment of monitoring the risk by identifying the unwanted risk and monitoring the exposure of risk. It is very difficult and complicated for the company to conduct the risk assessment. Risk assessment is directly related to the business plan of the company such as the steps for taking better decisions, determining or setting more targets for carrying out internal audit plans, improvement in the execution of the strategy and improving the performance and operational visibility of the company. The final step is monitoring the risk which includes the critical risk are to be ascertained in such a way that the company can overcome the risk and evaluate the cause of the risk, the impact of the risk on the company, and the options that is provided for the mitigation of risk or the resolution of the risk. The managing and the litigation of risk is considered as an important and vital element for the success of the company Major differences Therefore it can be concluded that the risk management process of small and large firms are almost similar but the difference is that large firms are affected more severely by the occurrence of risk then the smaller firms because the investment of capital is more in case of the large firms. But in case of risk of debt the small private firms suffer more than the public limited corporations. Small private companies have low overhead cost as compared to the large public limited companies. And the small private firms generally face the risk of obtaining credit as compared to the large public limited companies. Read More