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Publication year : 0
Thematic : Capacity Building
Language : English
Note
Businesses exist to take risks. Capital is put at risk in order to earn a return on the firm’s manufacturing, service, merchandising or research and development strategies. These may be thought of as the “core risks†that every business is organized to take. The act of going into business signals an intention to accept these business risks and to manage them successfully. However, there are other business risks, usually outside of the control of the firm, that may not be intrinsic or core to the operation of the business. These include the risks of changes in interest rates, currency parities, input prices and output prices as they affect the cash flows and values of the assets and liabilities of the firm. It is management’s responsibility to decide what constitutes the firm’s core business risks, and thus will be accepted and managed, and what constitutes non-core risk that is outside the competency or purpose of the firm to manage for which they will require some form of hedge or insurance. Although basic hedging techniques have been used for hundreds of years, risk management, as a specialized activity, is a comparatively new field having begun in the late 1970s and early 1980s. “Risk management is the process of moving clients closer to their desired risk profiles by helping them to shed unwanted risk or acquire new risks that suit their portfolios. At times, this can be done simply by matching a client who wants to shed risk with one who wants to acquire that risk. More often, it involves unbundling, transforming and repackaging risks into bundles tailored to fit the particular needs of various clients†(Sanford, 1993). Markets now routinely enable an airline to remove its exposure to fuel prices, an exporter to eliminate exposure to a foreign currency or a pension plan to temporarily reduce its exposure to stock prices or interest rates. Derivatives are the instruments through which this is accomplished. As the Group of Thirty has observed (G-30, July 1993), the introduction of these instruments has not resulted in risks not already present in financial markets. The overall level of risk in the economy has not increased, but rather is being distributed or transferred from one party to another. Perhaps, in a sense, derivatives can be thought of as reducing the overall level of risk in financial markets because, even though they do not make risks disappear, derivatives reallocate risks to the parties with the greatest capacity or appetite to bear them. Because of this, derivatives have become indispensable to modern financial markets, and their economic benefits are by now widely recognized. “Derivatives markets are an integral part of the financial system in the world’s leading economies. They play an increasingly important role in “...risk management ...price discovery and ...transactional efficiency...†(Jorion and Da Silva, 1995). Firms should use “natural hedges†(see glossary) whenever possible without resorting to the use of derivatives, but this usually requires a long lead time to alter the firm’s cash flows in its income statement or alter the assets and liabilities in its balance sheet. The transactional efficiency of derivatives to reduce currency or interest rate risks is unmatched in terms of speed of execution and cost. Furthermore, derivatives allow new information to be incorporated swiftly in markets, enhancing their price discovery function. Bank involvement with derivative activities—both for risk management and as a line of business— is considerable, and supervisory authorities are paying heightened attention to the risks that derivative activities represent for the banks that engage in them. The Basle standards measuring market risk along with credit risk in assesing capital adequacy, are only one manifestation of this supervisory This primer provides an overview of the changing nature of finance and how this evolution has caused bank supervisors to change the way they oversee their banking and securities markets. The paper discusses the components of risk management in terms of legal, operational, credit and market risks, and identifies best practices in risk management. Finally, it suggests areas in which the Intertrend. American Development Bank may assist official regulators and the private sector to create the legal and institutional infrastructure for these markets and to instill best practices.
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Keywords : Glaucidium cuculoides
Encoded by : Mae Belen Llanza
