Identify Business Risk

In: Business and Management

Submitted By ausalexanderhu
Words 358
Pages 2
2. Identify the risk management issues illustrated by the case.
Risk Management Failures
For a time during fall 1998, hedge funds seemed to be on the front page of every newspaper in the world. Investors in some hedge funds had taken huge losses following the collapse of the Russian economy in August, and the Federal Reserve felt it necessary to organize a rescue of a hedge fund called Long-Term Capital Management. The following policy and regulatory issues are raised by the LTCM debacle.
First, even when the LTCM know the examples about the possibility of losses in less liquid positions, the LTCM’s risk managers ignored the severity of the jump in credit spreads and the liquidity crisis instead of using flight-to-quality model to fix it. The worse is it still utilizing the same covariance matrix to measure risk and to optimize positions inevitably results in biases in the measurement of risk.
Second, the LTCM did not have suitable strategy to deal with the situation that there are other players held similar relative-value bets and that interrelations between them tend to vanish due to the market stress. It did nothing except using the same strategy to take positions that appear to generate “arbitrage” profits based on recent history but also represent bets on extreme events, like selling options.
Third, according to the fund’s Value at risk (VAR) and the amount of capital necessary to support its risk portfolio, the LTCM’s strategies are analyzed, and illustrates that LTCM had seriously underestimated its risk due to its over reliance on risk concentration and VAR which even defective and even be dumped by other firms.
Fourth, the LTCM is still not clear that the data gathering is not root methodology to predict the future crisis. Furthermore, relative-value traders of LTCM used to avoid risk limits, which it contrast to the other firms using risk limits to…...

Similar Documents

Business Risk

...Introduction and Overview Business complexity and increase in uncertainty amplifies the conflict between documented means of managing risk and current practices. While companies had been conventionally addressing issues of foreign exchange, taxation, interest rate and prices, the widespread adaptation of internet in sourcing customers and online facilities are creating a new wave of corporate risks. Do current corporate risk practices prove wrong the established academic theories? Large Corporation such as Lehman Brothers, Northern Rock, Royal Bank of Scotland and many organisations had fallen to receivership all across the world showing the evident of the necessity of risk management strategy and a business continuity strategy. Some multi national organisations had also been exposed to risks such as Sony with unidentified battery issue before release of product in 2006, Dell supply chain problem in 2007, fiasco caused by software failure in 2008 to British Airways etc. This is because they had failed to take into account risks that could be created by people, resources and occurrence that is outside the normal business practises. Risk management is now an essential element of organisation’s strategy by putting in place a process to handle risk in priority of the likelihood of occurrence. The managerial decisions necessary for smooth running of organisation cannot be taken without element of risk. As a cornerstone of business practice the question management need to......

Words: 2842 - Pages: 12

Business Risk

...Business Risks: 1. Apollo specializes in technologically superior athletic podiatric products which has huge R&D expense. However, there is possibility that there is only small market demand even none. 2. Company products are shipped to large and small retail outlets in a six-state area; we need to further information to investigate if Apollo has diversified his marketing strategy (targeted customers) 3. On September 15, 2010, the Company agreed to settlement totaled $11,695,000 (4.86% of net sales; 267.56% of net income) of a law suit for patent infringement for the Company’s use of the Siren. 4. The management believed that 2% increasing in sales in year 2010 compared to year 2009 is due to the introduction of new products and 8% decreasing in gross profit in year 2010 compared year 2009 is due to the suppliers for raw materials. Generally speaking, the new product often comes along with higher profit margin. There are possibilities that the Company is losing customers or the Company is not developing new products for the needs of the market. | Yr 2010 | Yr 2009 | % | Gross Sales | 245,075 | 237,199 | 0.03 | Sales Return & Allowance | 4,500 | 900 | 4.00 | Net Sales | 240,575 | 236,299 | 0.02 | 5. The Company’s principal source of operating funds has been from the proceeds from short-term borrowing against a $50 million line of credit which is on annual renew basis. The Company would have the ongoing concern if it cannot be qualified......

Words: 516 - Pages: 3

Identify Risks to Agency Operations

...Identify risks to agency operations Task 1 Find a newspaper/magazine/internet article that relates to one of the risks to agency operations (economic, financial, social, technology, human behaviour, occupational health and safety, legal, political, social, property and equipment, environmental and natural events). Using the table below, say how the subject of the article will possibly affect the business, it’s likelihood, consequences, level of risk and what steps could be taken to minimise or transfer the risk: |Newspaper/magazine/internet article: | | | |Business risk is the risk which is associated with core business activities, for example, Demand creation, supply, operations, production, raw | |material procurement etc. If an organization fails to properly manage these activities then the probability of impact of these failures on revenue| |becomes too high and the business can loose some part of its sales. Due to lower revenue the profits of business gets negatively impacted, | |particularly in case where Fixed Cost is very high the magnitude will be very high.  | |while on the other side, financial risk is associated with the debt......

Words: 1532 - Pages: 7

Business Risk

...A risky business Dodie: We are all here now. As you know that Zelal Sulen is our new boss now. After she took up the official post, she found that Hi-Style is out of touch with its target consumers and is losing direction. As the member of manager consultants, for this point, today we need to think out at least two options to advise her to improve the situation. Am I understood? And think a while... Okay, let's make a start. Who want to speak first? Lily: Well, in my opinion, Hi-Style could allocate £10m to new investment in the business. For example, it could improve distribution and sales through an exclusive agreement with a major retailer, which could provide a steady marketing channel. Second, to launch new product ranges with major advertising campaigns. Thus, new products will be known to customers. Hi-Style could definitely reach wide publicity. Thirdly, to employ brand development consultants so as to improve its image. Brand development consultants are more professional so that better brand image will be built, leading to its properous future. Fourthly, to hire a top retailing executive to run the business. Therefore, the business will be more smooth and sales will be increased. The last one is to commission City Associates to do a thorough review of all Hi-Style's activities, from which Hi-Style could catch a better understanding of the whole business to control its operation. Dodie: Good.Thanks. Lily. And what's your opinion, Serena? Serena: Well, I prefer......

Words: 1463 - Pages: 6

The Risks of Doing Business in China

...The Risks of Doing Business in China Despite recent measures to curb corruption, foreign investors doing business in China must remain vigilant. Tuesday, June 04, 2013 , By Jim Barratt and Jimmy Ko China's economy is the second-largest in the world and continues to grow at an astonishing rate. Just recently, in fact, the Asian Development Bank forecasted that China's economy will grow by 8.2% this year. However, while economic growth brings business opportunities to all investors, continued widespread corruption in China has affected its government's legitimacy in maintaining prosperity in the region and can bring a multitude of risks to financial services companies that are doing business there. With China's recent transition to new leadership complete, it has been interesting to observe the ruling party's heightened focus on tackling corruption. Under China's new president, Xi Jinping, it has conducted a visible anti-corruption drive and imposed austerity measures in an effort to curb the display of wealth by government officials and generate goodwill among the Chinese population. While critics say that the recent measures target only the most conspicuous displays of wealth by government officials, the anti-corruption drive has already netted dozens of officials. Moreover, some perceive that the recent election of Wang Qishan as the new head of China's anti-graft body, the Central Commission for Discipline Inspection (CCDI), signals that the financial sector could...

Words: 3430 - Pages: 14

Business Risk Management

...Summary This report is produced for the purpose of training staff in major risk areas. It draws on the BP oil spill case in the Gulf of Mexico to identify areas of major risk and how these risks were dealt with. In order to allow for more comprehensive analysis, attention is focused on mainly three risk management issues faced by BP. Ineffective management, regulatory failure and crisis containment failure were the three risk management issues identified. In the case study we found BP’s management to be ineffective as its promotion of a profit based organizational culture not only leads poor decisions based on cost cutting criteria to be taken, but also prevents organizational learning. BP management further failed to co-ordinate and communicate effectively, further exposing the company to greater risks. All these problems associated will poor management of the company demonstrate the importance an effective management system that promotes long term sustainability instead of short term profits. Nations and companies may often view government regulations as an additional check, expecting regulation to take preventive or corrective actions where they fall short. In BP’s oil spill case however government and company interdependence increased the complexity of the situation which resulted in both failing to take corrective actions to reduce risks while also failing to formulate an appropriate crisis plan. This......

Words: 305 - Pages: 2

Companies and Business Risk Auditing

...ACCTG20040 Auditing and Ethical Practice Assessment item 1: Term 3, 2013 Understanding Companies and Their Business Risk Prepared by: Timothy Supandji Table of Contents EXECUTIVE SUMMARY 3 Factors in understanding company and business risk before accepting as New Client 4 Comparison of the Overall Financial Conditions of BHP Billiton Ltd and Rio Tinto Limited during the GFC 6 Explanation of risks associated with BHP and Rio Tinto Ltd during GFC 8 Managing Business Risk: BHP Billiton Ltd Vs Rio Tinto Limited 10 CONCLUSION 11 EXECUTIVE SUMMARY There are four purposes for this report. It attempts to provide description of what factors that the auditors need to consider in understanding a company and assessing business risk before attempting any audit work on a particular client. The second aim is to explain the comparison of financial conditions between BHP Billiton Ltd and Rio Tinto Limited during the Global Financial Crisis that occurred in 2007 to 2008. Further, the risk that is associated with BHP and RIO during the Global Financial Crisis will be explained. Finally, this report intends to explain of which company is better in handling and managing the business risk during the Global Financial Crisis. Factors in understanding company and business risk before accepting as New Client Generally speaking, at the time when there was a Global Financial Crisis, it has detrimental effect to the companies globally with downfall of share prices.......

Words: 3025 - Pages: 13

Risk in International Business

...Commercial Risk Commercial risk involves the ability of firms to strategize successfully and implement its strategy through effective tactics. The challenge is that any mistakes made abroad can be more costly due to local government regulations. Sudden changes in the trade laws and legal systems in other countries exposes international firms to regulatory risks. For instance changes in a country’s banking system may limit a firm’s access to funding or their ability to repatriate money to their home countries. A major commercial risk is usually lack of knowledge of the international market. If exporters, for example do not have in-depth knowledge on the area where its sales are being made, it is more likely to fail in international business. Commercial risk occurs as the result of inadequate formulation and implementation of strategies, tactics and procedures. These also include timing of the company into a particular market, the competitive intensity existing prevailing in the market, poor strategy execution and the weakness of the partner and also the various kinds of operational problems. It should however be considered that commercial risks are usually unpredictable and it is therefore essential for firms to lay down effective strategies in place to ensure that this risk is reduced. Currency Risk Currency or Financial risk occurs as a result of the daily fluctuations of different currencies against each other. It also includes the valuation of assets and the......

Words: 1642 - Pages: 7

Business Risk

...| | | Table of Contents | | Page no. | Project Brief | 1 | SECTION 1: IDENTIFICATION AND CLASSIFICATION OF RISKS | 3 | | Political, Legal and Regulatory RiskExclusive rights granted by the government of PrussiaImport bansChange in legal requirementsChange in political situation between Azerland and PrussiaChange in CapitalChange in RegulationsBusiness risk and Operational RiskReduced demand for ticket salesIncreased ticket pricesDelays or cancellations due to technical faultsTotal disregard to airline safetyFlight crew stress and fatigueNegligence of airline to check policy proceduresEnvironmental RiskAccessibility increases tourismGenerous CargoBusiness and infrastructure development in AzerlandNoise and Air PollutionAirport ExpansionReputation Risks * Lack of Public Confidence in Airline Operator – Through Technology Risks * Lack of Public Confidence in Airline Operator – Through Human RisksNegligence of Airline Technical Staff * Unreliable Journey Times * Airport Security and Terrorism * International Risks * Rights Granted by Government of Prussia Revoked * Termination of Lease Agreement of International Airline * Contract with Mosco, Prussia Based Catering Company * Outbreak of War – Force Majeure * Change of......

Words: 10067 - Pages: 41

Risk Taking in Business

...Risk Taking in Business When I think of the word risk I think of daredevils, rebellious teens and getting into something you just might regret and according to the Business Dictionary they define risk as a “probability or threat of damage, injury, liability, loss or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through preemptive action.”(Home,2014) We’ve been taught throughout our lives that those daredevils and rebellious teens were bad, but who’s to say they just weren’t risk takers. Risk taking is something you have to do in order to make a profitable and successful business, just look at some of the most successful businesses out there today they didn’t get there not taking risk. I’ve come to realize with all my research there are good and bad risk and understanding the thin line between the two could mean the difference between a smart business decision and unwise mistake. Taking risk is not something to do lightly it takes calculated reasoning and beneficial risks require careful planning. Bad risk tends to be a product of thoughtlessness. Fortunately, most CEOs and business owners wouldn't have arrived at their current position if they regularly made the latter type of decisions. (Hendricks, 2014) So I wonder what is a good risk? And I found it is the product of assessing needs, identifying areas that need improvement, formulating strategic plans and executing initiatives while anticipating mistakes...

Words: 1914 - Pages: 8

Business Risk

...of risk and uncertainty on business growth and sustainability in Nigeria. Introduction Business Risks Facing Small and Medium Enterprises (SMEs) and large firms operate in the same business environment but there are evidences that they derive different benefits and opportunities therein. More so, they are exposed to diverse categories of risks. This is because of their differences in economic capacity including asses to human capital and material resources. Kelkar (2008) posits that SMEs are weak in terms of business plan, management structure and in decision making when compared to large organizations. This further increases SMEs’ inability to absorb most business uncertainties and risks. According to Suh (2010) SMEs sector is worst affected by the economic environment and is the first to be hit by any external shock. As a result, there are more SMEs closures than establishments, with approximately only 1% of SMEs growing from having five or less employees to ten or more (Mead and Liedholin 1998; cited in Smith and Watkins, 2012). The implication is that SMEs face a wider range of business risks which are rooted in both the internal and external environment of the enterprises (AIRMIC, ALARM and IRM, 2002). There are various ways of categorizing risks faced by business organizations (SMEs inclusive). Business risks are commonly categorized into four major types. This categorization is developed with the emergence of Enterprise Risk Management (ERM). Impact of Business......

Words: 1544 - Pages: 7

Identify Risk

...Case Study: Business plan (excerpt)   Case Study: Scenario As part of their overall strategy in the Australian beverage market, MacVille Pty Ltd have developed a chain of cafes in the Central Business District (CBD) of Brisbane, Queensland and the CBD of Sydney, NSW. The board of directors have made the decision to expand their operations in Queensland with the purchase and re-branding of the existing Hurley’s cafe in Toowoomba, 130km west of Brisbane. You are currently the assistant manager of their flagship store in Queen Street, Brisbane, and have been given the opportunity to manage the new store in Toowoomba. The CEO for MacVille’s cafes in Queensland is Paula Kinski. You are a member of the Finance, Audit and Risk Management (FARM) Committee described in the MacVille Risk Management Policy. Paula has assigned you the task of managing the risks involved with the operational aspects of this take-over. A copy of her email is attached. Email from CEO – Paula Kinski From: CEO – P.Kinski To: Assistant Manager – Queen Street Re: New Toowoomba store Congratulations on your new appointment. Prior to taking up your position as manager of our Toowoomba store located in Ruthven Street, the board has asked that the risks in this project be appropriately managed. I want you to undertake this task as it will give you significant insight into the store’s operations, it will ensure a smooth transition to the MacVille systems and will encourage you to give ongoing support......

Words: 3619 - Pages: 15

The Importance of Risk Management to a Business

...The Importance of Risk Management to a Business All organizations encounter uncertain events when trying to achieve their objectives. These uncertain events may arise inside or outside the organization. Each individual uncertain event that would impact one or more objectives is known as a risk. If the risk would have a negative impact on the business if it occurred, then it is a threat. If it has a positive impact then it is known as an opportunity. The combined effect of risks to a set of objectives is known as risk exposure, and is the extent of the risk borne by that part of the organization at that time. Risk has always been an inherent feature in any undertaking therefore risk management is not a new concept for organizations. The earliest application of risk management within organizations tended to focus on insurance management in terms of establishing financial capacity for the negative effects of adverse events. During the 1970s a broader view started to emerge whereby organizations began to develop a better understanding of the nature of the risks being faced and looked at alternatives to insurance. There remained, however, a focus on the negative effects of risk. Only in recent years have organizations begun to recognize that risk management, in its broadest sense, applies to both negative threats and positive opportunities. In each case a proactive approach is required, which seeks to understand the size of the possible threats and opportunities so that a......

Words: 1027 - Pages: 5

Business Risk

...Social Responsible they must select rightly if not it can affect the company. There are three type of International Corporate Social Responsibility. 2.1.1) First is environmental responsibility. Environmental responsibility is organizations starting to focus on their waste and carbon footprint and find solution to reduce it. Besides that, companies must look for new ways that their operations can be more productive for the environment, by having a minimal impact. 2.2.2) Next is philanthropic responsibility. Philanthropic responsibility is like the organization gives money to donating to national and local charities. Usually, the organizations will have specific charities that they support, and these may be linked to business. 2.2.3) Besides that is ethical responsibility. It can be done by the organization meet their profitable which organization willing to pay higher wages, offering employees better benefits, avoiding trade with unscrupulous companies or providing jobs to those who would otherwise have difficulty finding work. Moreover, it is also focused on making sure that all stakeholders receive fair treatment. 2.2) Some company will concern what they can get from and bad effect of International Corporate Social. We will discuss what is the advantages are and disadvantages of the company will get if they do International Corporate Social Responsible. 2.2.1) Company will get advantages from International Corporate Social......

Words: 2074 - Pages: 9

Business Risk Management

...Business Risk Management Fukushima Daiichi – Nuclear Disaster Pedro Eza ID number: z3366523 Executive Summary Fukushima crisis management showed system failures from the public and private actors that led to overall human error and opened a continuous debate within international community about holding nuclear plants under public hands rather than private ones whose incentives clearly differ from the public interest: * The Government and regulatory agencies failed to push Tepco to heed several anomalies and warnings causing the operator to be unprepared at an operational risk level evidencing an embarrassing incompetency to make decisions. * Tepco, as this report will prove below, lacked a culture of safety failing to respond effectively to subsequent events after the accident. For all these, the need to build an adequate resilience framework within the nuclear industry covering the main pillars: Crisis Management, Disaster Recovery, Business Continuity and Emergency Management, are paramount within risk management. Case’s Background On March 11, 2011, Japan suffered an earthquake of magnitude 9.0 with an epicenter......

Words: 2139 - Pages: 9