Risk management has become a hot buzzword in corporate and financial circles. The reason is not hard to find. With continued deregulation of financial markets and capital controls volatility in the price of commodities, foreign exchange, credit, and equities has become the order of the day. These price gyrations not only impact internal reporting processes but also expose the firm to the risk of economic losses. This has spurred a host of managerial activities aimed at identifying a firm’s exposure to this volatility, deciding which risks to hedge against, and evaluating the results of a given risk management strategy.
The rapid growth of risk management services suggests that management can enhance firm value by managing market risks. Investors and other corporate stakeholders expect financial managers to identify and actively manage such exposures. At the same time, advances in financial technology have made it possible to shift market risks to someone else’s shoulders.
However, the burden of assessing counterparty risk, that is, the risk that this someone else will not default on their obligation, cannot be transferred and is now placed on the shoulders of a larger pool of market participants, many of whom may be located thousands of miles apart. The dependence this creates on international reporting practices and the resulting confusion caused by diversity in accounting for financial risk products is onerous. Those with risk management skills are highly valued by the market.
