Risk Management Assessment - Case Study Example

Name: Institution: Title: Risk Management Assessment (Ampella) Professor: Course: Date of Submission: Acknowledgment I would like to first and foremost offer my sincerest appreciation to my supervisor, DR/Sir/ XXXXXX who has sacrificed his/her time in a move to support me throughout this report, through his/her endurance and knowledge whilst giving me a chance to work at my own pace. I attribute the level of my bachelor’s degree to his support in this event without him/her could not have been possible. I have been aided for substantial time by the various articles and books in preparation of this report (Ampella Annual Report, 2010) through XXXXXXX. Moreover I have been assisted by colleagues who have encouraged me cheerfully to provide valid and conclusive analysis of the report. Letter of transmittal (sample) Source: Ampella limited Table of Content 1. Executive summary …………………………………………………………………....…. 5 2. Introduction………………………………………………………………………...……. 6 3. Objectives ………………………………………………………………………….……. 6 Risk Identification ……………………………………………………………...……. 7 4. Analysis ……………………………………………………………………..……...…… 7 5. Discussion ……………………………………………………………………..….…… 10 Hypothetical system development..……………………………………………….... 10 Liabilities of the hypothesis ……………………..……………………………...….. 11 6. Recommendation ………………………………………………………………...……. 12 Financial portfolios …………………………………………………………..……..12 Strategies to manage the risk ………………………………………………………. 12 Limitation ……………………………………………………………………...…… 13 Tasks of the risk management committee ……………………………………..…… 13 Risk management………………………………………………………………….... 13 7. Conclusion …………………………………………………………………………..…. 13 8. Reference …………………………………………………………………………….… 15 9. Appendices ………………………………………………………………………..…… 16 1. Executive summary Financial uncertainty risks are the biggest threat that challenges the running of firm’s, hindering efficient performance and general productivity. Thus the report relays on how to deal with risks both hypothetically and practically. Hence risk are managed through assessing value using tools to quantitatively evaluate the impact, transitions and potential losses realized through financial risk the firm (Ampella Limited) is exposed to. Therefore the firm can successfully employ enterprise risk management (ERM). Thus careful ERM involves a chain of strategies in order to shield stakeholder’s value, sensitize stakeholders on the risk and optimum tolerance to the risk. Through this the firm will be able to increase its value and its potential by venturing into profitability. Background Information 2. Introduction Over the recent decades, the financial markets have increasingly become volatile due to the significant changes happening in both domestic and at global financial markets. Immediately after post war period, managers of the corporate organs had little to worry when it concerned foreign exchange rates, while interest rates were fairly and stable allowing firms to know with great certainty their home currency expected and plan for exports. Considering the financial situation of Ampella, we review the financial management and the risk factor in the year 2009/2010. During the last twelve months, the firm financial situation has transformed from a small to a major player on the West African mining investments, with much earnings derived from the Batie West Gold project located in Burkina Faso. In the last few years, the firm has grown to a complete re-rating in terms of share price with the most impressive performance unveiled in the last 12 months. This has created a positive view in the market it is involved.1 3. Objectives of the Report 1. Identify, evaluate, examine and manage risk 2. Enlighten stakeholders of the substantial changes on Ampella’s risk profile. Risk identification Current changes in the international business environment and the increased volatility of interest rates and foreign exchange rate movements which have developed to a profound implication; this primarily can be used in defining how Ampella deals with their financial risks. These are part of the firm’s aspects only affect quarterly profits, but rather determining firm’s survival. Management of firms financial assets have a role in identifying the risks involved in the investment, as the corporate treasurers has become an important area of concern for the mining industry on the global scene. This dissertation seeks to analyze how the Ampella mining activities manages their financial risks in this era as much pressure mounts from its business investments in concern to the financial environment volatility2. In reviewing Ampella’s operations, a great effort is achieved at the firm’s investments made at the Batie West Project. The firm has made a strategic decision by imitating a joint venture in its two other projects in Burkina Faso namely Madougou project and the Doulnia project. 3. Analysis Risk Evaluation The firm’s activities were exposed to a variety of financial risks, market risks; credit risks the foreign currency risks, liquidity risks and cash flow interests market. Vulnerability of the threat that is assets The financial risks mainly target the accounts, insider trading, in receivership trading, allied party transaction and takeovers. The group overall risk management focuses on the unpredicted financial markets and seeks to minimize potential adverse effects on the financial performance of the firm. Cash Flow and Fair Value Interest Source: Ampella Annual Report 09/10. From the figure given in the cash flow statement above it is evident that the firms current operating cash flow operations has increasing relied on the liability usage, as the previous year a $ 4,526.373 to more liability recorded at $ 9,895,258. Further the damage on the firm’s cash is well exposed in the investment activities as more cash is splashed out in purchasing the firms property plant and equipments for the financial year ending 2010, a total of $ 1,672,348. This was a rapid increment on overall investment spending compared to the previous years $133,293. However, the cash and cash equivalent at the end of the year reveals a positive reflection on the financial stability when it concerns cash and cash equivalent. On a general view $ 12,144,729 cash and cash equivalent was recorded in 2010, a higher figure when compared to the previous year $ 3,053,0623. Market risk Evaluating the firm’s earning per share indicates an increases loss which is primarily attributed to ordinary share performance continued selling below the expected. For instance, the fiscal year ending 2010, the share holders’ equity earnings per share stood at $10.79 which revealed an increased value from $6.37 recorded in the immediate fiscal year ending at 2009. This exposed risk, requires immediate action from the Ampella management4. Foreign Currency The foreign transaction currencies are translated to the respective functional currencies of the group entities at exchange rates. This arises from when translating company’s financial reports basing on the firms currencies used for informational and comparative usage. The business deal exposures do not signify the actual progress of cash between diverse currency systems. This influences the consolidation profit and loss accounts as well as the balance sheet. In real sense the balance sheet effect are often dismissed as an illusion that has no cash impact. There are two major controversies surrounding the foreign currency transaction. The first case relates to transaction model used, while the second points out the resulting loss reported in the income statement5. Liquidity Risk The liquidity risk has adversely increased this is well revealed in the spending. The management system in this case has indicated a positive forecast on the liquid fiancé resources in financing the operating activities in the current fiscal year. The net cash outflow from the operating activities is recorded at $9, 895,092 and compared to the previous years which were at $4,430,613. This is an increased spending, revealing the firm requires immediate realignment aimed at addressing liquidity of the firm6. 4. Discussion Hypothetical system development Therefore the committee will develop a hypothetical system which will be used to reduce the risks. This will hence be used to analyze the whole portfolio of derivatives for optimization rationale. Two primary theories which are non-mutually exclusive can be used that is maximization of investor value and maximization of management for corporate risk management7. Involvement and volume assessment Through assuming that hedging is costly in terms of either fixed or variable costs, insurers have non-zero positions in terms of fixed costs of establishing derivatives. Therefore if participation decision is focused towards these fixed costs we would postulate that firms with highest prevalence to risks for instance high lenience for risk per unit of anticipated returns. In this event it would find it easy to enter the derivative market, though executives with high anticipation for risks will equivalently hedge less. This is in regard to each additional costs unit imposes insignificant costs in the form of risk premiums. In such hypothesis it follows that procedures of threats may have converse signs in the involvement vs. volume regressions. Having this in mind corporate will turn onto specific rationale to engage in risk management8. Shareholder Value Consideration The firm hence would engage in equivocation activities to evade the risk of financial agony. Risks that impacts from bankruptcy for instance permissible fees, stakeholders also face expenses emerging prior to insolvency. This will enhance the relationship between the vital staff and clientele. Financial risk hence arose due to stagnation of cash flows as a result of being un-hedged unforeseen events. It therefore compels the executive to forego cost-effective ventures as a result of lack of the seed investment9. Liabilities of the hypothesis The hypothetical system lacks the tangible part and though it is more often ignored by organization because it lacks identification capability. For instance when inadequate knowledge is employed to an incident (financial incident) in Ampella when less effective procedures are applied, the risk would lead into a chain of threats. They will reduce the output of knowledge workforce, decrease cost effectiveness, productivity, service, product value and earnings. They also face difficulties in resource allocation that is the capital which could otherwise be spent on more profitable ventures bringing the notion of opportunity cost10. 5. Recommendation Financial portfolios: This is made possible through a prioritization procedure whereby risks with the greatest loss and utmost likelihood of occurring are handled primarily. On the other hand risks that have the lowest probability of occurrence and lowest losses are in this event handled in descending order. This is putting into consideration the risk identified11. Strategies to manage the risk In a move to reduce the threats that are posed by the risk that is financial risk Ampella to design a system which mitigates the threats. Therefore the system is characterized by certain potential it entails: identify, assess and manage the risk; update the stakeholders of the transitions on the risk profile. In this event the firm needs to put into deliberation dynamics that are appropriate to the organization, establishment of a committee to manage the risk. Therefore the risk management committee is the core of the firm’s structure. It ensures that the stakeholders are aware of the financial risk that the firm faces by employing the system. Limitations If the threats are evaluated and prioritized time is highly consumed in countering the losses that have the probability to occur. This will redirect resources that would be used for more profitable ventures. On the other hand qualitative risk management lacks consistency. Therefore the projects that are underway will be subject to stagnation through project suspension until the risk is mitigated. Tasks of the Risk Management Committee It will in this event identify the internal and external threat related to financial risk. This will involve the realization of the causes and the effects it may impact into such. The board will establish the system which will be used by the committee12. The board then supervises the tasks of the committee that is annually and quarterly through assessing the efficiency and the system’s implementation. The committee then prioritizes the financial risks which will allow Ampella plan, evaluate and implement its policies. Risk Management The established committee would then use certain options to manage and combat the risk. Through monitoring and assessing the risk the firm will be able to diminish the risk to controllable levels by the board and executives. Hence through: transfer the risk to supplementary parties, evade the risk, reducing the depressing effects of the risk and accommodating the costs of the risk. 6. Conclusion The decisive use of these strategies may not be practically possible since most of them involve trade-offs that are not legally permissible to the organization. Through the employment of various techniques for instance the ACAT that is Avoid, Control, Accept, or Transfer. The use of ACAT is used in various procurement procedures in which risk management figures prominently in both decision making and planning. Moreover the firm would thus consider in not buying in order not to take the risk that was to occur13. For example it would evade indulgence into more new projects to counter this. Through reduction of the severity of the loss or the prevalence of loss occurrence the firm management will in this event design an internal monitoring tool that evaluates threats posed to firm. 7. Reference Alexander, C. A The Professional Risk Managers' Handbook: A Comprehensive Guide to Current Theory and Best Practices, PRMIA Publications, Asheville, 2005. Australia, S. A Risk management, Standards Association of Australia, North Sydney, 1999. Dorfman, M Introduction to Risk Management and Insurance (9 ed.), Englewood Cliffs, Prentice Hall, New Jersey, 2007. Hubbard, D The Failure of Risk Management: Why It's Broken and How to Fix I, John Wiley & Sons, Chicago, 2009. Ampella Mining Limited Ampella Annual Report 09/10. Retrieved on 23rd August, 2011 from: Ampella Mining Limited, Risk Management Guidelines and Policy, ACN 121 152 001, Ampella Mining Limited, 2010. 8. Appendices ACAT - Avoid, Control, Accept, or Transfer ERM- Enterprise risk management Read More