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Summary of chapter 48 : Managing financial risks
 
  Due to the growing volatility of foreign exchange rates, interest rates, share prices or the prices of raw materials, risks to which companies are exposed have significantly increased in the past 30 years. Credit and counterparty risk, along with political risk are also on the rise.

We can identify four major risks:

- market risk, i.e. exposure of the company to unfavourable changes in interest and exchange rates or prices of raw materials or shares;
- liquidity risk, i.e. the inability of a company to make its payments by their due date;
- counterparty risk, i.e. the loss of repayments of a debt in the event of default of the creditor;
- political risk which impacts on importers, exporters and companies that invest abroad.

Market risks are accurately measured with the notion of position and Value At Risk (VAR). Liquidity is measured by comparing debt repayment and expected cash receipts. Techniques for measuring other risks are still in their infancy.

When confronted with risk, a company can:

- decide to do nothing and take their own hedging measures. This will only apply to some of the risks of very large corporates
- lock in prices or interest rates for a future transaction by means of forwardation
- insure against the risk by paying a premium to a third party which will then assume the risk if it materialises. This is the same idea that underlies options.
- immediately dispose of the risky asset or liability (securitisation, defeasance, factoring, etc.).

The same types of product (forward buying, put options, swaps, etc.) have been developed to cover the four different risks and are traded either on the OTC markets or on stock exchanges. On the OTC market the company can find products that are perfectly suited to its needs, but there is the counterparty risk of the third party that provides the hedging. This problem is eliminated on the futures and options markets, although the price paid is reduced flexibility in tailoring products to companies’ needs.

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