tailieunhanh - PORTABLE MBA IN FINANCE AND ACCOUNTING CHAPTER 13

13 FINANCIAL MANAGEMENT OF RISKS. Steven P. Feinstein. For better or worse, the business environment is fraught with risks. Uncertainty is a fact of life. Profits are never certain, input and output prices change, competitors emerge and disappear, customers’ tastes constantly evolve, technological progress creates instability, interest rates and foreign-currency values and asset prices f luctuate. Nonetheless, managers must continue to make decisions. Businesses must cope with risk in order to operate. Managers and firms are often evaluated on overall performance, even though performance may be affected by risky factors beyond their control. . | FINANCIAL 13 MANAGEMENT OF RISKS Steven P. Feinstein For better or worse the business environment is fraught with risks. Uncertainty is a fact of life. Profits are never certain input and output prices change competitors emerge and disappear customers tastes constantly evolve technological progress creates instability interest rates and foreign-currency values and asset prices fluctuate. Nonetheless managers must continue to make decisions. Businesses must cope with risk in order to operate. Managers and firms are often evaluated on overall performance even though performance may be affected by risky factors beyond their control. The goal of risk management is to maximize the value of the firm by reducing the negative potential impact of forces beyond the control of management. There are essentially four basic approaches to risk management risk avoidance risk retention loss prevention and control and risk Suppose after a firm has analyzed a risky business venture and weighed both the costs and benefits of exposure to risk management chooses not to embark on the project. They determine that the potential rewards are not worth the risks. Such a strategy would be an example of risk avoidance. Risk avoidance means choosing not to engage in a risky activity because of the risks. Choosing not to fly in a commercial airliner because of the risk that the plane might crash is an example of risk avoidance. Risk retention is another simple strategy in which the firm chooses to engage in the project and do nothing about the identified risks. After weighing the costs and benefits the firm chooses to proceed. It is the damn the torpedoes approach to risk management. For many firms risk retention is the optimal strategy for all risks. Investors expect the company s stock to be risky and they do not reward managers for reducing risks. Investors cope with business 423 424 Planning and Forecasting risks by diversifying their holdings within their portfolios and so they do