risk management essay

risk management essay

The Importance of Risk Management in Modern Business Operations

1. Introduction to Risk Management

Furthermore, the way in which investment risk is handled should also help the investment manager to provide returns to both creditors and financial investors who can be encouraged to acquire a comprehensive understanding of the corporation’s business and finances. To accomplish this, the corporation must have incentive structures that align the interest of the investment manager with those of the providers of equity and debt capital. Effective investment risk management is thus a key to the basic elements of investment management – incentives and investment discipline. It should be noted that investment risk management is often confused with the theory of portfolio choice, initiated by Harry Markowitz in 1952, as a branch of financial engineering. The Markowitz model has, over time, proved to be very powerful at both predicting and explaining situations in which standard investment risk management tools might be faulty. The theory, however, does not cover the scope of investment activities that risk management should cover.

Risk management is vital in every business activity, as business constantly involves uncertainties and risk. A good understanding of possible future events that may have an impact on the business and an effective plan are crucial for successful risk management. This is one of the most crucial challenges for investment management in today’s world, given the complex framework of all dimensions that governs investment. Managers have many reasons to be worried about the future due to the rapid development of world financial markets where many corporations and other institutional investors manage their assets as well as liabilities with a complex group and the rapidly-changing investment products. Also, during the last decades, creditors and equity holders seem to find it vital to impose restrictions on risk-taking by financial institutions and by non-financial corporations. Another group who are concerned about risk management is financial regulators who want to be sure to minimize the potential for system disruption posed by any single financial institution should it teeter on the brink of bankruptcy.

2. Key Concepts and Principles of Risk Management

The renewed attention to the various aspects and forms of risk is due to the difficulties faced by a company or a public or international organization in achieving its goal or mission. Risk is the basis for many interconnections, such as power and power. Most activities need to be managed ‘based on the cost of establishing and maintaining appropriate security levels’. According to the results, political, professional, and investment decisions are made based on different ‘evaluations’ of risks and benefits. Essential goal factors, proposed corporate strategies, and operational interventions need to be associated with performance assessment criteria and reasonable assumptions about the future of stakeholders. Risks generate performance – while taking appropriate risks, such as responding to threats and opening up new opportunities, it is the method to devote at least some of the efforts and resources available. With the risk coming from the future and leading to losses or efficiency erosion solutions are sought by predictably increasing and uniquely responding to the predictable risk in the strategic plan and budget estimates.

In the professional in-depth literature, a number of basic and typical concepts in the field of risk management are outlined. Its meaning and significance as an independent and complex activity related to the management of various types of business risk are clarified. The most comprehensive meaning of risk is considered to be a deviation from anything that does not meet the requirements, such as uncertainty and financial losses. It also includes the victim of the benefits of the ‘new opportunities’ that have appeared – ‘a chance’ that is not always used. The risk of a negative impact of force, damage, or loss of activity may be due to negligence, accident, natural disaster, incompetence, or crime, and so on. In investment management, risk is considered to be both a favorable opportunity and an unfavorable external effect or internal error.

3. Risk Assessment and Analysis Techniques

Aggressive risk management assumes that decision makers evaluate potential risks (loss impacts negatively associated probabilities) when making strategic, operating, and investing decisions. This concept defines “risk management” as a collection of business techniques for forecasting risk and reducing its impact on an enterprise’s earnings and returns. Properly constructed, a “risk management” program can improve profits and cash flow in conjunction with a reduction of the firm’s risk of bankruptcy or need to retrench. Another definition of “risk management” describes a program as an essential aspect of the firm’s “value maximization” strategy and a prerequisite for the success of such a strategic process. This definition indicates a shift in emphasis from an exclusive fanatical concern with maximizing short-term profits (step function) to a broader concern with maximizing long-term business asset value. It suggests that the accomplishment of the unique strategic aim of a corporation to maximize the long-run value of all the various securities issued by the enterprise to its claimholders has an overwhelming influence on the firm’s risk management system. It also emphasizes the interrelationship between the firm’s operating, investing, and financing decisions, and its risk characteristics and cost of capital. Finally, this definition suggests that effective risk management begins with weaknesses in traditional risk management and internal control procedures as reflected by the increase in derivative-related losses. It simply illustrates that dramatic changes in the competitive and regulatory environments have caused the loss exposure of the modern business enterprise to grow significantly more complex and uncertain in recent years. As a result, the conventional property and liability methods are rapidly being supplemented and replaced by other business techniques designed to identify, quantify, manage and finance these exposure risks.

Risk management involves the identification, analysis, and treatment of exposures to accidental losses. Its purpose is to provide a cost-effective method by which the organization can handle the risk of accidental loss. Risk management offers several techniques for managing the consequences of accidental loss; these include contractual transfer of risk, hedge transactions, formation of a controlled captive insurance company, non-insurance items, and traditional insurance by means of self-insurance or commercial insurance. In addition to these methods for managing the consequences of accidental loss, risk management uses many techniques to prevent accidental losses from occurring. Most, but not all of these methods prevent potential losses because they offer a direct return, as well as a negative report from a hazard. Incorrectly, many risk managers believe that the risk management process begins with the precautions that can prevent a potential loss, and includes techniques that keep the potential accident from leading to an undesirable result. In recent years, risk management has broadened its definition to include the identification and treatment of any kind of more general non-speculative risk.

4. Implementing Effective Risk Management Strategies

The goals of a Risk Management Process are to maximize the prosperity of an Organization and its includes, where applicable, the Organization’s service delivery objectives. In practice, Risk Management systems seek to achieve these goals by active preventive and protective measures that deal with events, to lessen the impact of adverse events or to increase the intensity of favorable events on the Organization. As well as ensuring that all levels of risk within the scope of Risk Management are identified and understood, the Risk Manager needs to be clear about how the Organization’s activities are distributed among available continuum of risk management strategies within the Operating Cycle Framework, and about how these strategies contribute to the overall objectives of the Organization and the risk management strategies are cost-effective and practical.

Any business that undertakes a project risks potential losses as well as gains. As well as offering opportunities, projects expose an organization to risks. Nevertheless, avoiding all risks by not embarking on any commercial projects which could incur risk would also involve costs, such as forgoing business opportunities. The essence of being in business is that companies take calculated risks in the expectation of making profits. Consequently, the risks associated with a given project, or sub-project, have to be assessed and managed. Therefore, understanding and using techniques for activities that assess and limit their potential losses, risk management that can be used by companies to account for its exposure to books are necessities.

5. Case Studies and Real-World Applications

Several current business publications have a general focus on risk and regularly present a variety of articles and commentary on this topic. Some of the business risk the magazines are, however, either too high level or have restricted geographic distribution to provide a solid enough source of reading material for a comprehensive risk management subject. Suitable materials may also be found in several specific industry or country risk profiles and research reports provided by leading business consulting firms. These enterprises can also be beneficial by considerably enhancing the case study component of such a subject, providing briefings and presentations to offer another pertinent source of experience and wisdom.

Case studies and real-world applications demonstrating effective risk management procedures are essential for educating and training individuals in this discipline. The authors of a recent text on operational risk management have resorted to collecting a number of case studies from both public domain information and interviews with corporate risk managers and similar individuals. The result is instructive, but because the text is a reasonably traditional exposure of the risk management discipline, case studies are presented in a series of thematic chapters, usually presented after a discussion of the type of risk involved. As a result, in order to maintain some level of real-world guess, both the same case study might need to be referred to a couple of times rather than in the one sequential description of events.