IN THE NAME OF ALLAH THE MOST

BENEFICENT THE MOST MERCIFUL

PRESENTED BY:
AAMNA NASIR (03)
AYESHA BAKHTAWAR (04)
ZAHRA MALIK (18)
SUMERA SAEED (26)
M. HASSAN AWAN (50)
ASAD JAVED (38)
TAJAMUL HUSSAIN (55)
M. NOMAN HABIB (16)
MOHSIN AWAN (46)
ABDULRAB KHAN (53)

RISK MANAGEMENT
GROUP D

FINANCIAL RISK
The financial risk as far as it affects the

corporate treasurer manager, can be defined

as:
The extent to which an organization may incur
losses.
Or
The probability that an actual return on an
investment will be lower than the expected
return.

An organization may incur loss as a result of:

An adverse movement in prices or rates in

certain financial markets.

An adverse change in financial markets.

WHY MANAGE FINANCIAL RISK?

The objective of managing financial risk is:
To reduce the volatility of return from a
security.
Avoiding financial distress.
Preventing an adverse impact on a companys
chosen strategy.

TREASURY RELATED FINANCIAL RISKS

The following are the most common classification of
financial risks that relate to corporate treasury operations:
Financial risk
Liquidity risk
Foreign exchange risk
Interest rate risk
Commodity risk
Counterparty risk
Equity risk

1. FINANCING RISK
It is the probability of loss that increases as the
repayment period of credit and loan increases.
Risk that a company may either be unable to
finance itself in its chosen debt markets.
Some other risks are closely related to financial
risks which are as follows :
Bank relationships
Credit ratings

2. LIQUIDITY RISK
Itis the risk that a company or bank may be
unable to meet shorttermfinancial demands.
This usually occurs due to the inability to convert
a security orhard assettocash.
Liquidity risk results from insufficient financial
resources to meet day-to-day fluctuations in
working capital and cash flow.

3. FOREIGN EXCHANGE RISK

It is the risk that an investor will have to close out a long
orshort positionin a foreign currency at a loss due to an adverse
movement in exchange rates. Also known as "currency risk" or
"exchange-rate risk".
It exists when a financial transaction is denominated in
acurrencyother than that of the basecurrencyof the company.
It includes:
Transaction risk
Pre-transaction risks
Translation risk
Economic risk

TRANSACTION RISK
Transaction riskis theriskthat a company will incur
losses in a transactioncomprising multiple currencies
due to exchange rate movements.
Transaction risk is:
Short term
Revenue in nature
Created where there is a firm commitment to pay or
receive in a foreign currency.

PRE-TRANSACTION RISK
Contingent foreign exchange exposures arising before
entering into a commercial contract.
For example:
Publication of a price list
Overseas sales not yet made but forecast by the
company
forecast

TRANSLATION RISK
The exchange rateriskassociated with

companies that deal in foreign currencies or list

foreign assets on their balance sheets.
The greater the proportion of asset, liability and
equity classes denominated in a foreign
currency, the greater thetranslation risk.

ECONOMIC RISK
Economic risk is the chance that conditions like
exchange rates, government regulation, or political
stability will affect an investment, usually one in a
foreign country.
Economic risks are long term in nature.

4. INTEREST RATE RISK

Itis theriskthat arises for bond owners from
fluctuating interest rates.
How muchinterest rate riska bond has depends on
how sensitive its price is tointerest ratechanges in
the market.
The sensitivity depends on two things:
The bond's time to maturity, and
The couponrateof the bond.

5. COMMODITY RISK
Commodity riskrefers to the uncertainties of future
market values and of the size of the future income,
caused by the fluctuation in the prices of commodities.
Arises when a companys cost structure is influenced
by fluctuations in the price of energy or certain raw
materials.
Thesecommoditiesmay be grains, metals, gas,
electricity etc.

6. COUNTERPARTY RISK
It is theriskto each party of a contract that the
counterpartywill not live up to its contractual
obligations.
Counterparty riskas ariskto both parties and should
be considered when evaluating a contract.
In most financial contracts,counterparty riskis also
known as "defaultrisk".

7. EQUITY RISK
The financialriskinvolved in holdingequityin a
particular investment.
Refers toequityin companies through the
purchase of stocks.
Arise in mergers and acquisitions.

MANAGEMENT OF FINANCIAL RISK

The following are the steps in the management of financial
risk:
Identification of financial risk
Measure these risks
Company risk management policy.enriching company
treasury policy
Implementation of financial risk management programme.
Reporting
Re-evaluation of whole management process

1. IDENTIFICATION OF FINANCIAL RISK

Analyze the income statement and balance sheet on a
line by line basis and identify those financial risks which may
apply to each line.
Income statement
Turnover
CGS
Other General costs
Balance sheet
Assets
Liabilities

INCOME STATEMENT
Turnover :
Sales of company and currency in which company is
trading.
Standard terms of business.
Company products , their quality and price.
Competitors based company
Hedging policy

INCOME STATEMENT
Cost of goods sold:
Company manufacturing cost.
Production process , amounts of raw material or semifinished goods purchased overseas.
Company supplies based or not.
Other general cost i.e. interest rate expense , vehicles
leased etc

BALANCE SHEET
Balance sheet
information

Financial risk assessment

Capital structure risk

Liquidity risk

Insolvency risk

Debt ratios analysis

Liquidity ratios analysis

Financial balance analysis

Comparing debt capital

to equity capital

Comparing current assets

to current liabilities

Comparing fixed capital

to fixed assets

Exposure to financial risk

MEASUREMENT OF FINANCIAL RISK

A company may decide that interest rate risk and

foreign exchange risk which are its major financial

related risk and measurement of size of all these
risk that exist in your finance.
A company must quantify the size of these risks.
The financial projections, budgets and forecasts
are used by treasurer to identify the size of
financial risks.

BUSINESS PLANNING PROCESS

The following are the financial projections, budgets and forecasts that
the treasurer uses to identify the size of financial risks:
Three year business plan
Company SWOT
Strategies
Operation
Products
Financial projections
Annual budgeting
Monthly reports and forecasts

RANKING OF TREASURY-RELATED
FINANCIAL RISK
The most usual way of ranking treasury risk is

attempting to measure their Scales and Magnitude.

The following are the ways an organization use for
ranking the risks:
Notional change in rates or prices.
Mathematical technique such as value at risk, cash at
risk and earning at risk.
Qualitative measurement.

NOTIONAL CHANGE IN RATES OR PRICES

This assesses he impact of national change in the

market rate or prince on the underlying risk.

The assessment is often made by comparing the
magnitude of such national changes benchmark
such as the underlying budget or forecast for the
review.

MATHEMATICAL TECHNIQUES
Value at risk:
A risk management model that calculates the largest
possible loss that an institution or other investor could
incur on a portfolio. Value at risk describes the
probability of losing more than a given amount of
assets, based on a current portfolio.
Cash flow at risk:
The risk that a company's available cash will not be
sufficient to meet its financial obligations.

ESTABLISHING RISK MANAGEMENT

POLICIES
The company establishes the policies and

procedures to identify, assess and manage critical

areas of material business and financial risk.
A company first needs to consider what its risk
management objectives are.

CONTENTS OF TREASURY POLICIES

The Companys approach to financial risk management will
be enshrined in its treasury risk policy. This will include
statements defining:
What its principal financial risks are?
What its objectives are in managing these risks?
Who has responsibility for managing the risks?
What instruments are authorized to be used?
What reports will be submitted and to whom?
The Treasury risk policy is generally approved by main board.

MANAGING RISKS
Risk management steps would be:
Examining forecast borrowings over the next three years.
Determining the level of those borrowings that are at fixed
rate.
Implementing any necessary hedges.
Making a further decision where the level of fixed rate
borrowings is.

REPORTING
Most treasury departments produce a monthly treasury
report that summarizes:
Financial exposures outstanding.
Hedges in place. This may be further analyzed between
those brought forward from the last report, those maturing
this month/period and new hedges implemented.
Sensitivity analysis.
Recommendations as to action

TREASURY COMMITTEE

Some organizations use a treasury committee to review

outstanding financial risks periodically. Members of the

committee may be the treasurer, the finance director or
chief financial officer, and perhaps the director of
strategy.
The objective of the committee is to bring a group
perspective to bear on treasury risk management.
Decisions on treasury risks will be made in the light of
all risks currently being faced by the company.
Other organizations may just use periodic meetings
between the treasurer and finance director to
determine what further risk management action needs

ENTERPRISE RISK MANAGEMENT

Enterprise risk management (ERM) is the process of

planning, organizing, leading, and controlling the

activities of an organization in order to minimize the
effects of risk on an organization's capital and
earnings. Enterprise risk management expands the
process to include not just risks associated with
accidental losses, but also financial, strategic,
operational, and other risks.

CONT..
Steps involved in implementing and maintaining an effective
risk management system are:
Identifying risks
Ranking those risks
Agreeing control strategies and risk management policy
Taking action
Regular monitoring
Regular reporting and review of risk and control.

IDENTIFYING RISKS

Risks are often classified into:

Business Risks
Operational Risk
Financial Risk
Compliance Risks

QUANTIFYING AND RANKING RISKS

Most organizations therefore rank such risks according to:
High likelihood of occurrencehigh impact: Consider for

immediate action.
Low likelihood of occurrencehigh impact: Consider for
action and have a contingency plan.
High likelihood of occurrencelow impact: Consider action.
Low likelihood of occurrencelow impact: Keep under
periodic review.

AGREEING CONTROL STRATEGIES

Generally there are four main ways of dealing with risks:
Accept them: Some risks may be inherent to the business (e.g. economic

risks or volatility), and investors may actively have sought securities

reflecting them. In addition there may be some cases when the costs of
managing risks are greater than the benefits from risk reduction.
Transfer them: This is usually done through insurance or derivatives.
Reduce or manage them by improving controls within existing

processes; for example by improving production control techniques to

reduce the likelihood of stock-out of raw materials.
Eliminate them: Generally through the pursuit of existing strategies. For

instance, the risk of market share pressures may be handled through an

existing strategy of repositioning products and expanding the product
range.

TAKING ACTION AND REPORTING

Not only does the agreed action need to be taken

but a regular reporting procedure needs to be put

in place. In a small organization, responsibility for
this may be delegated to the finance director or
chief executive, but in larger organizations this
role is likely to be undertaken by a risk
management committee, led by senior executives
or board directors.

IMPLICATIONS FOR THE TREASURER

It can be seen that the steps adopted in such a process are

essentially the same as those adopted by the treasurer in
identifying and managing risks within the scope of the
treasury department. The treasurers risk management
routines will in most organizations be part of the
organization-wide risk management routines. Treasury risks
and action to identify, measure, manage and report them
need to be set within the framework of corporate-wide risk
management