WHY MANAGE RISK?

Annisa Swavira 29114858

Fatia Lovita 29114783
Nabillah 29114786
Veby Zhera 29114836
Vynica Septariani 29114772

BACKGROUND
RISK MANAGEMENT

HOW TO MANAGE RISK?

MITIGATE RISK

MITIGATE RISK ?
Hedging : Completely eliminates an exposure
eliminating both upside and downside
Insurance : As the name suggests provides protections
against the financial effects of unfavorable events, but
leaves the exposed party with the potential benefit
from favorable events
Diversification : Can mitigate certain types of risk

OBJECTIVE
MANAGE RISK

INCREASE
FIRM VALUE

WHO INVOLVES?
COMPANY
HIGH RISK HIGH RETURN

SHAREHOLDER
LOW RISK HIGH RETURN
( Risk Averse )

MANAGING RISK IN SEVERAL

CONDITIONS
1. Financial Distress : Term in corporate finance used to indicate a condition
when promises to creditors of a company are broken or honored with
difficulty.
If Financial Distress cannot be relieved = LEAD TO
BANKCRUPTCY
This conditions can generate significant disruptions in
the companys day to day operations & strategic
positioning
CAN USE RISK MANAGEMENT, HOW? AND WHY?
This policy can create value IF the value that the
firm protects in the product markets > cost it will
pay in the financial markets for risk protections

2. Investment policy : a document that formalizes an institutions goals,

objectives, and guidelines for asset management, investment advisory
contracting, fees, and utilization of consultants and other outside
professionals
Example :
This condition represent at DIFFICULT YEAR
Biotechnology Company has large R&D expenditures
This company will face 2 alternatives. First, cut back on some or all of Its
R&D expenditures. Second, access capital market for external funding
If the company take a first alternatives, R&D will suspended and the
competitor will take a place with gain a lead in bringing new products
to market. If the company take a second alternatives, the market will
face downturn.
USING RISK MANAGEMENT POLICY : The company should manage its
expenditures properly, so that all of risk condition will be spared

3. Tax Effects : The condition when the firm face progressive or convex tax
schedule, in which tax rate climb with pretax income. (convex tax function
implies increasing marginal tax payments as income rises)
If the company get high income, the company must pay the high
rate tax as well, and if the company get low income, the
company must pay low rate tax as well
Company objective = High income with low tax rate
Using Risk Management Policy = The company just pay the average
of tax rate from average income

4. Transaction Costs
Transaction cost influence to Investors decisions
USING RISK MANAGEMENT
Individual investors = HIGH TRANSACTION COST HIGH RISK
and Large Institutional Investors = LOW TRANSACTION COST
LOW RISK (reduce transaction cost on risk sharing)
For each investors, they have strongly different view on risk

5. Asymmetric Information :
Information Gaps
The condition in which at least some relevant information is known
to some but not all parties involved. Information Asymmetric causes
markets to become inefficient, since all the market participant do
not have access to the information they need for their decision
making processes
This often happens in transactions where the seller knows more
than the buyer, although the reverse can happen as well.
Potentially, this could be a harmful situation because one party
can take advantages of the other partys lack of knowledge
6. Managerial Concern
Poorly diversified human capital = High Risk
USING RISK MANAGEMENT POLICY
If the company using employment contract, those employee
couldnt make to satisfy these risk averse managers. So that,
the managers take a decision to using no employment
contract because it would add more value to the firm and no
cost expenditures for risk management programs.

THANK YOU