FINANCIAL RISK MANAGEMENT

Risk-Any adverse deviation from expected return.

Financial risk management is the practice of creating economic value in a firm by using

financial instruments to manage exposure to risk, particularly credit risk and market risk.

Other types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks,

etc. Similar to general risk management, financial risk management requires identifying its

sources, measuring it, and plans to address them.

Financial risk management can be qualitative and quantitative. As a specialization of risk

management, financial risk management focuses on when and how to hedge using financial

instruments to manage costly exposures to risk.

In the banking sector worldwide, the Basel Accords are generally adopted by internationally

active banks for tracking, reporting and exposing operational, credit and market risks.

Financial risk management is a business process that helps a corporation avoid losses because

of changes in financial product prices or business partner defaults. Financial risk management

tools typically use mathematical and statistical formulas to identify, assess and control risks.

Financial risk management activities focus primarily on market and credit risks.

PUR POSES:-

A financial risk management process includes all mechanisms and policies that a company's

top management puts into place to avoid (or limit) losses due to security prices or trade

partner defaults. For example, a financial risk management program at Company A, a larger

retailer in California, may cover policies that managers establish to avoid losses that may

originate from customer defaults. Company A's policies may require credit history checks for

all customers who use corporate credit cards to purchase more than $1,000 worth of goods.

FUNCTIONS:-

Financial risk management professionals help a corporation prevent losses inherent in

financial transactions. A financial risk management specialist typically holds an advanced

degree--for instance, a master's or a doctorate degree--in mathematics, statistics or

investments. A financial risk management specialist uses math skills to build complex tools

and computer models that appraise and monitor financial risks. A financial risk management

specialist also may be a financial auditor working for a public accounting firm or the internal

audit department of a company.

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TYPES:-

Financial risk management activities focus primarily on two types of risk---market

and credit. Market risk is the risk of loss that may arise if security prices vary. For example,

Company B, a beer distribution company, owns $1.5 million worth of stock in its short-term

portfolio. After three months, the portfolio's value fell to $1 million. The loss of $500,000 is

due to market risk because security prices in the portfolio dropped. Credit risk is the risk of

loss that arises when a business partner files for bankruptcy. For example, Company B may

lose if a major customer (who owes $1 million) files for bankruptcy.

BENEFITS:-

Financial risk management activities focus primarily on two types of risk---market

and credit. Market risk is the risk of loss that may arise if security prices vary. For example,

Company B, a beer distribution company, owns $1.5 million worth of stock in its short-term

portfolio. After three months, the portfolio's value fell to $1 million. The loss of $500,000 is

due to market risk because security prices in the portfolio dropped. Credit risk is the risk of

loss that arises when a business partner files for bankruptcy. For example, Company B may

lose if a major customer (who owes $1 million) files for bankruptcy.

When to use financial risk management

Finance theory (i.e., financial economics) prescribes that a firm should take on a project when

it increases shareholder value. Finance theory also shows that firm managers cannot create

value for shareholders, also called its investors, by taking on projects that shareholders could

do for themselves at the same cost.

When applied to financial risk management, this implies that firm managers should not hedge

risks that investors can hedge for themselves at the same cost. This notion was captured by

the hedging irrelevance proposition: In a perfect market, the firm cannot create value by

hedging a risk when the price of bearing that risk within the firm is the same as the price of

bearing it outside of the firm. In practice, financial markets are not likely to be perfect

markets.

This suggests that firm managers likely have many opportunities to create value for

shareholders using financial risk management. The trick is to determine which risks are

cheaper for the firm to manage than the shareholders. A general rule of thumb, however, is

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that market risks that result in unique risks for the firm are the best candidates for financial

risk management. The concepts of financial risk management change dramatically in the

international realm. Multinational Corporations are faced with many different obstacles in

overcoming these challenges. There has been some transactions exposure, accounting

exposure, and economic exposure.

INTRODUCTION

Risk Management is the process of managing the risks involved in various activities. It is, in

fact, a “rapidly developing discipline” which applies to “any activity whether short or long

term” (IRM, AIRMIC, and ALARM, 2002: 1). Risk Management is being increasingly

implemented in various disciplines, organizations and industries to minimize negative

impacts and form a sound basis in decision making (Stoneburner, Goguen, and Feringa,

2002).

WHY RISK MANAGEMENT?

Translation practice is a purposeful activity requiring constant decision making. However,

decisions cannot be made without considering the requirements of the job at hand, the client,

the governing law, market, recipients, norms, culture, budget and other factors. Looking at

the translation industry, we can also trace a broad range of responsibilities and decision

making situations which translation service providers and outsourcers are faced with and

must handle every day.

When the factors affecting the decision making process increase just like above, it becomes

really difficult to take into account and manage all of them in an all-inclusive manner.

Without a proper risk management scheme, handling this extensive range of decision making

situations and risks and taking into account all issues affecting and resulting from the

decisions can turn into a laborious task.

Also, in the current competitive market which more often than not, role players prefer not to

share their management plans and experiences with others, it is even harder and more

exhaustive for the beginners to survive. They, in fact, have to pass through a long term trial

and error to learn how to make proper decisions. This inevitably involves frustration,

unexpected failure and profit loss before they can gain some experience to come up with a

proper scheme. That is all because, they have not been taught how to deal with decision

making situations and risks involved in translation practice and industry during

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theireducation. Perhaps it is better to say, there has been no risk management guideline,

scheme, or policy in the first place to be incorporated into translator training programs.

It can be claimed that the process of risk management has always been there in translation

practice and industry in the sense that translators and project managers in translation

companies have always been subconsciously trying to control the risks pertinent to their

activities. This is in fact what Pym has been trying to prove by interpreting the results of

other researchers’ investigations in terms of risk management (Pym 2007; 2008).

RISK MANAGEMENT IN TRANSLATION

Risk management here can be defined as the process whereby role players in translation

practice and industry systematically address the risks attached to their activities with the goal

of achieving success within each activity and across the portfolio of all activities. According

to IRM et al (2002: 2), “The focus of good risk management is the identification and

treatment of these risks” and “It increases the probability of success, and reduces.

RISKS AND SUCCESS IN TRANSLATION

The purpose in translation practice and industry is to achieve success in general.  Success is,

in fact, the “reward” (Pym, 2008) role players achieve when they handle their job properly.

Here are some examples of reward: self satisfaction, financial reward in forms of monthly

salary, bonus or a raise in the salary, successful communication, avoidance of criticism,

getting published, being well received by the society, etc. Therefore, reward can be defined as

what the role players in translation practice and industry expect to achieve from doing their

activities. It is also worth mentioning that rewards can fall under various categories, three of

which have been pointed out by Pym (2008) as financial, symbolic or social. As you can see,

success is mostly mutual, meaning that you benefit from your work if your recipients who

can be your manager, your client, or the public are satisfied with your 

Risk in translation practice and industry, is better realized when in correlation with success.

Therefore, risk would be the potential for events, decisions and consequences in translation

practice and industry which constitute opportunities or threats to success. Risk itself can be

divided into three categories of low,medium and high based on the probability or frequency of

occurrence and the impact of occurrence. Also factors resulting in risks or “drivers of risks”

(IRM et al, 2002) can be internal or external to translation activity or a mixture of both. There

are five major risks which role players in translation practice and industry have to constantly

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deal with considering the types of activities they are engaged in: market risks, financial

risks, project risks, production process risks, and product risks.

Market risks

Can be defined as those risks in the market which can positively or negatively affect

the translation practice and industry and include among others market fluctuations and

rivals. 

Financial risks  

Are those risks which can affect the profitability of translation activity or translation

companies in a positive or negative way. One example can be the current ups and

downs in foreign exchange rates which may cause freelance translators and translation

companies to revise the foreign currencies they accept either to benefit from what

may appear to them as opportunity or prevent loss. 

Project risks

Refer to the risks each new project brings with it which can affect the profitability of

the translation activity or company, the production process and the final product of

translation activity in a positive or negative way. Project risks include those risks

regarding the clients’ reliability, project difficulty, software needed for the project,

word count, deadline, human   resources  and the like. It might be argued that the

remaining two categories can fall under the project risks category; however as you

will see, due to their importance and different nature, production process risks and

product risks have each formed a category, quite separate from the project risks

category. By production process, the author is referring to the actual act of translation;

thus, 

production process risks

Would be those risks which role players constantly face during the process of

translation and the way they treat such risks may ultimately bring about success or

failure for them.

  product risks  

Are those risks which can positively or negatively affect the success of the final

product of the translation process. Risks related to the acceptability, formatting and

DTP issues of the translation product can be categorized under the product related

risks.

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From the definitions provided above, we can categorize market, financial, and project risks as

externally driven risks and production process and product risks as internally driven risks. It

is important to note that according to the definitions provided above, risks are not always

considered as threats and they may ultimately constitute an opportunity for benefit and

success. Furthermore, as you can see these risks can be interrelated and the occurrence of one

can intensify the occurrence and impact of another.

RISK MANAGEMENT PROCESSES

In order for role players in translation practice and industry to successfully manage risks, they

must go through a series of risk management processes. Close adherence and follow up of

these processes, which are briefly described below, is crucial to the achievement of success.

RISK ASSESSMENT

Risk Assessment is defined by the ISO/IEC Guide 73 as the overall process of risk

analysis and risk evaluation.

RISK ANALYSIS

According to ISO/DIS 31000 (2009), Risk analysis is performed through:

Risk Identification

Risk Description

Risk Estimation

Risk Identification helps the role players in translation practice and industry find out their

“exposure to uncertainty” (IRM et al, 2002: 5). To successfully identify possible risks, role

players need to have professional knowledge of their job, be aware of the market condition

and requirements, and know the legal, social, political and cultural environment in which they

are working.

Risk Description is meant to display the identified risks in translation practice and industry in

a structured format which explains the name, scope, nature, and significance of the risk along

with the role player's risk tolerance and control mechanism.

Finally, Risk Estimation is made in terms of the probability of occurrence and the possible

consequence of the risks in translation practice and industry. Role players need to use the

result of the risk analysis process to produce a risk profile which gives a significance rating to

each risk and provides a tool for prioritizing risk treatment efforts.

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RISK EVALUATION

Risk evaluation is used to make decisions about the significance of risks to translation

practice and industry and whether each specific risk should be accepted or treated. The

decision needs to be made based on the risk criteria which can include associated costs and

benefits, and legal requirements of dealing with each risk.

RISK REPORTING AND COMMUNICATION

Risk reporting and communication needs to be done at two levels: Internal and External.

Internal reporting and communication involves publishing a clear risk management policy by

the freelance translator or the manager of the translation company to be used when facing a

risk.

External reporting works on a bigger scale and can target the publication industry,

organizations, and ministries governing education and publication. Translation companies

and translation departments of universities can report and publish their risk management

policies and their effectiveness in achieving objectives on a regular basis and actively take

part in producing and updating risk management policies for translation practice and industry.

RISK TREATMENT

According to IRM et al (ibid), “risk treatment is the process of selecting and implementing

measures to modify the risk”. An important fact role players in translation practice and

industry need to keep in mind is that risk treatment actions must be financially justifiable,

meaning that they must be cost effective.

Risk treatment actions in translation practice and industry need to be prioritized in terms of

their potential to success and reward achievement and as mentioned earlier, they must be

concerned with both positive and negative aspects of risk. Pym (2008, p. 20) has

acknowledged the importance of such an approach in his law like formulation about how

translators translate: “Translators will tend to avoid risk by standardizing language and/or

channeling interference, if and when there are no rewards for them to do otherwise”. Four

major strategies role players can implement in order to successfully manage risks in the

translation practice and industry, are explained below with an example for each of them.

Risk Avoidance (avoiding or eliminating the risk): e.g. during the process of

translation, you come across a complex sentence and there is the fear that some part of

the meaning implicit in the original text might be lost or the reader would not be able

to understand the meaning if the sentence is translated as a complex sentence.

Therefore, you decide to avoid the risk by breaking the original sentence and

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translating it into a compound sentence. One possible reward: avoiding

misunderstanding, or achieving communication! What explained is called

“explicitation” according to Baker (1996, p.180) and is one of Baker’s proposed

universals. However, bear in mind that explicitation is not exclusive to risk avoidance

and may be used as a risk reduction strategy in another context.

Risk Reduction/Mitigation (reducing or mitigating the risk): e.g. while translating,

you come across a term which does not have any equivalence in the target language

and its translation turns into an awkward phrase. To reduce the risk of

miscommunication, you may resort to transliteration. One possible reward: achieving

communication!

Risk Transfer (outsourcing or transferring the risk): e.g. you have translated a book

but you are not sure about the market response and don’t want to budget for the

publication. Therefore you would try to transfer the risk by managing to convince a

publication company to publish the translation and pay for the publication expenses

and in return you revoke your request for royalty. One possible reward: you get

published!

Risk Retention (accepting the risk and budgeting for it): e.g. the publication company

you work with, does not accept to pay for the publication of a book you have chosen

to translate or have already translated; however for some reason, you are determined

to translate and publish the book and decide to take the risk and pay for the

publication expenses. One possible reward: self satisfaction perhaps! Also you get

published!)

These strategies can be used separately or in combination based on the freelance translators

and translation companies’ risk management plan.

MONITORING AND REVIEW OF THE RISK MANAGEMENT PROCESSES

As mentioned earlier, in order for risk management to be effective, we need “a reporting and

review structure to ensure that risks are effectively identified and assessed and that

appropriate controls and responses are in place” (IRM et al, 2002: 11). Implementation of this

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stage also ensures that our risk management plan is up-to-date and in consistent with current

translation market situation.

RISK MANAGEMENT IN ACTION

In order to show how risk management can be implemented into translation practice and

industry, a case scenario is created in which a financial risk is raised. The project manager of

a translation company has received an offer for a translation job. After checking issues such

as client reliability, job difficulty, word count, and deadline of the project, the project

manager is now considering the rate suggested by the client. The following table represents

the project description:

Table Project description

Client Mr. X, returning client,

reliable

Project Name Bus manual

Service needed Translation

Source text difficulty Difficult; Technical

Word count 30000 words

Deadline Tight; 10 days

Software need SDL Trados

TM Not provided

Client’s suggested rate 0.06 USD per word

Company’s ideal rate for such job based on

Market rates

0.08 USD per word

Rate usually paid to translator(s) of the

company for such job

0.04 USD per word

Other costs 0.005 USD per word

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Figure   Financial risk management model

Credit risk

is an investor's risk of loss arising from a borrower who does not make payments as

promised. Such an event is called a default. Other terms for credit risk are default risk and

counterparty risk.

Investor losses include lost principal and interest, decreased cash flow, and increased

collection costs, which arise in a number of circumstances:

A consumer does not make a payment due on a mortgage loan, credit card, line of

credit, or other loan

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A business does not make a payment due on a mortgage, credit card, line of credit, or

other loan

A business or consumer does not pay a trade invoice when due

A business does not pay an employee's earned wages when due

A business or government bond issuer does not make a payment on a coupon or

principal payment when due

An insolvent insurance company does not pay a policy obligation

An insolvent bank won't return funds to a depositor

A government grants bankruptcy protection to an insolvent consumer or business.

Financial Risk Management

Financial Risk Management is the subject where you will find the way to manage to your

all types to financial risk. Now it has been in major business sector specialists are doing

optimization on risk management. It doesn't mean that financial risk management will come

in the same. Risk management is certainly a good manner to save companies asset & keep

distance from liabilities. But financial risk management is not a big part of risk

management. Yes some how it's related I can not push aside.

Finance theory provides that a middle level company should take a project when shareholder

value will increase. And it has been also seen that share holders value creates by business

manager, which is also known as investors  when you are applying your thoughts for

optimizing financial risk management means, business managers should not prevaricate

risks those investors can protect them the same cost. This impression is captured by the

coverage irrelevance suggestion: In market, the company can create value by covering a risk

when the price of abiding that risk within the enterprise is the same as the price of carrying

out the company.

Now the etiquette of financial risk management is getting changed world wide. Some

where financial risk management is related to enterprise risk management (ERM) that is the

extent of financial risk management, in a sense, the financing contingency. This concept is

somewhere elusive that has different meanings to different people. Companies have

experimented with the concept, which combines financial risk management, contingency

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plans and purchasing insurance in a single business unit. But some expertise professionals are

there who can maintain both.

Financial risk management is applied in different ways if you see organizationally. In the

board, there may be a risk committee. Usually there has some kind of risk committee

composed of senior managers. In practice, several names are given to these two committees.

Just like CRO (chief risk officer) and HRM (Head of the risk management). These

designation looks into the risk management. They look into the financial risk management

which includes credit risks, operational risks, and market risks.

The financial world requires professionals with strong analytical & mathematical skills

basically this is the combination of finance with mathematics, economics, accountancy, and

risk management. Prepare you for a career in investment management and risk management.

You can choose one of two specializations: Risk Management Professional and Chartered

Financial Analysis.

Five ways to manage financial risk

Financial risk management is a subject from which we can get the knowledge to manage our

all financial risk. Now the question is how to manage the financial risk.

1st of all we should know that what kind of financial risk there...

Here pointed out some major risks...

Market Risk

Credit Risk

Liquidity Risk

Operational Risk

reputation risk

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County Risk

Now how will you manage financial risk?

Here you will find   five ways to   manage financial risk :

1. Carry the right amount of insurance.Yes, Insurance is right way to manage your finance. You will see that there is very less percentages that have got the right amount of insurance. Many people takes an enormous risk

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of not having auto insurance coverage, while many more are jumping out in medical insurance, health insurance or any major coverage. Unfortunately, sometimes to cover the premiums there is not enough in the budget. But if you can afford it, do be sure to keep policies should be up to date and adequate for their circumstances.

2. Diversify your income & your investment.When I read about the problems of workers in the auto industry, I can understand about the importance of developing multiple way of income. My best advice is that invest your money as earliest possible to start working for you. You should about your money that its source of another income generator, other ways to create new revenue

Here is some evidence that demonstrates that diversification of the stock market works and is the best way to balance the overall portfolio risk.

3. Build an emergency fund.When I started to save, my first priority was to build an emergency fund. Decided that part of my savings should be in a short-term savings (savings a/c preferable) and how much to implement in the long-term investments.

4. Keep your savings under FDIC limits.Always try to keep your savings under FDCI limits, and remember that if your bank gets folded then you can lost your money as your banker will give you guarantee up to certain FDIC limits.

5. Limit debt and use credit wisely.You should not carry a much amount of debt. But you can use credit card, if you have control on your spending. You should remember that credit is tool and we should not abuse it.

And if you follow these five ways to manage financial risk certainly you will be beneficial.

Types of Liquidity Risk

Market liquidity - An asset cannot be sold due to lack of liquidity in the market - essentially a

sub-set of market risk. This can be accounted for by:

Widening bid/offer spread

Making explicit liquidity reserves

Lengthening holding period for VaR calculations

Funding liquidity - Risk that liabilities:

Cannot be met when they fall due

Can only be met at an uneconomic price

Can be name-specific or systemic

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Operational risk

An operational risk is, as the name suggests, a risk arising from execution of a company's

business functions. It is a very broad concept which focuses on the risks arising from the

people, systems and processes through which a company operates. It also includes other

categories such as fraud risks, legal risks, physical or environmental risks.

A widely used definition of operational risk is the one contained in the Basel II regulations.

This definition states that operational risk is the risk of loss resulting from inadequate or

failed internal processes, people and systems, or from external events.

The approach to managing operational risk differs from that applied to other types of risk,

because it is not used to generate profit. In contrast, credit risk is exploited by lending

institutions to create profit, market risk is exploited by traders and fund managers, and

insurance risk is exploited by insurers. They all however manage operational risk to keep

losses within their risk appetite - the amount of risk they are prepared to accept in pursuit of

their objectives.

Financial risk modeling

Financial risk modeling refers to the use of formal econometric techniques to determine the

aggregate risk in a financial portfolio. Risk modeling is one of many subtasks within the

broader area of financial modeling.

Risk modeling uses a variety of techniques including market risk, value at risk (VaR),

historical simulation (HS), or extreme value theory (EVT) in order to analyze a portfolio and

make forecasts of the likely losses that would be incurred for a variety of risks. Such risks are

typically grouped into credit risk, liquidity risk, interest rate risk, and operational risk

categories.

Many large financial intermediary firms use risk modeling to help portfolio managers assess

the amount of capital reserves to maintain, and to help guide their purchases and sales of

various classes of financial assets.

Formal risk modeling is required under the Basel II proposal for all the major international

banking institutions by the various national depository institution regulators. In the past, risk

analysis was done qualitatively but now with the advent of powerful computing software,

quantitative risk analysis can be done quickly and effortlessly.

Diversification

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In finance, diversification means reducing risk by investing in a variety of assets. If the asset

values do not move up and down in perfect synchrony, a diversified portfolio will have less

risk than the weighted average risk of its constituent assets, and often less risk than the least

risky of its constituents. Therefore, any risk-averse investor will diversify to at least some

extent, with more risk-averse investors diversifying more completely than less risk-averse

investors.

Diversification is one of two general techniques for reducing investment risk. The other is

hedging. Diversification relies on the lack of a tight positive relationship among the assets'

returns, and works even when correlations are near zero or somewhat positive. Hedging relies

on negative correlation among assets, or shorting assets with positive correlation.

Diversifiable and non-diversifiable risk

The Capital Asset Pricing Model introduced the concepts of diversifiable and non-

diversifiable risk. Synonyms for diversifiable risk are idiosyncratic risk and security-specific

risk. Synonyms for non-diversifiable risk are systematic risk, beta risk and market risk.

If one buys all the stocks in the S&P 500 one is obviously exposed only to movements in that

index. If one buys a single stock in the S&P 500, one is exposed both to index movements

and movements in the stock relative to the index. The first risk is called “non-diversifiable,”

because it exists however many S&P 500 stocks are bought. The second risk is called

“diversifiable,” because it can be reduced it by diversifying among stocks, and it can be

eliminated completely by buying all the stocks in the index.

Of course, there's nothing special about the S&P 500; the same argument can apply to any

index, up to and including the market portfolio of all assets.

The Capital Asset Pricing Model argues that investors should only be compensated for non-

diversifiable risk. Other financial models allow for multiple sources of non-diversifiable risk,

but also insist that diversifiable risk should not carry any extra expected return. Still other

models do not accept this contention.

Systematic risk

In finance, systematic risk, sometimes called market risk, aggregate risk, or

undiversifiable risk, is the risk associated with aggregate market returns.

By contrast, unsystematic risk, sometimes called specific risk, idiosyncratic risk, residual

risk, or diversifiable risk, is the company-specific or industry-specific risk in a portfolio,

which is uncorrelated with aggregate market returns.

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Unsystematic risk can be mitigated through diversification, and systematic risk can not be.[1]

Systematic risk should not be confused with systemic risk, the risk of loss from some

catastrophic event that collapses the entire financial system.

Systematic risk and portfolio management

Given diversified holdings of assets, an investor's exposure to unsystematic risk from any

particular asset is small and uncorrelated with the rest of the portfolio. Hence, the

contribution of unsystematic risk to the riskiness of the portfolio as a whole may become

negligible.

In the capital asset pricing model, the rate of return required for an asset in market

equilibrium depends on the systematic risk associated with returns on the asset, that is, on the

covariance of the returns on the asset and the aggregate returns to the market.

Lenders to small numbers of borrowers (or kinds of borrowers) face unsystematic risk of

default. Their loss due to default is credit risk, the unsystematic portion of which is

concentration risk.

Hedge

A hedge is an investment position intended to offset potential losses that may be incurred by

a companion investment.

A hedge can be constructed from many types of financial instruments, including stocks,

exchange-traded funds, insurance, forward contracts, swaps, options, many types of over-the-

counter and derivative products, and futures contracts.

Public futures markets were established in the 19th century[1] to allow transparent,

standardized, and efficient hedging of agricultural commodity prices; they have since

expanded to include futures contracts for hedging the values of energy, precious metals,

foreign currency, and interest rate fluctuations.

Types of hedging

Hedging can be used in many different ways including foreign exchange trading.[3] The stock

example above is a "classic" sort of hedge, known in the industry as a pairs trade due to the

trading on a pair of related securities. As investors became more sophisticated, along with the

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mathematical tools used to calculate values (known as models), the types of hedges have

increased greatly.

Hedging strategies

Examples of hedging include:

Forward exchange contract for currencies

Currency future contracts

Money Market Operations for currencies

Forward Exchange Contract for interest

Money Market Operations for interest

Future contracts for interest

This is a list of hedging strategies, grouped by category.

Financial derivatives such as call and put options

Risk reversal : Simultaneously buying a call option and selling a put option. This has

the effect of simulating being long on a stock or commodity position.

Delta neutral : This is a market neutral position that allows a portfolio to maintain a

positive cash flow by dynamically re-hedging to maintain a market neutral position.

This is also a type of market neutral strategy.

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