The Chinese symbol for risk combines danger with opportunity. Modern corporate r
ID: 2801728 • Letter: T
Question
The Chinese symbol for risk combines danger with opportunity. Modern corporate risk management seeks to manage both of these risks with the goal of maximizing firm value. What role does each of the following tools or concepts play in achieving this goal? (Please answer in broad terms only. For most tools or concepts, 2-3 sentences should be sufficient.)
i. Insurance
ii. Statistics / heat maps / Monte Carlo simulation
iii. Discounted cash flow method of firm valuation
iv. Derivatives
v. Alternative risk transfer (ART) techniques
vi. Real options
vii. Strategic risk management
viii. Enterprise risk management
Explanation / Answer
Risk is the main cause of uncertainty in any organisation. If not planned at an early stage it may affect the organisation badly.
There are concepts/ tools which help it identifying the risks and help in reducing the damage to the organisation.
i. It helps the companies to secure their positions if some risks are taken. it serves as a vital risk management tool with less expenditure and more covereage of the company and its assets.
ii. Series of probablities got through mathematical computerised techniques or statistics collected from the work conducted and finding best as well as the worst possibility. It tries to ease out the work
iii. Time value of money is the heart of this method. A discount rate is examined as the means to reflect risk in discounted cash evaluations.
iv. Hedging of a position to protect the risk of any adverse effect. it helps to protect against and adverse price movements or variations.
v. Its one of the newest areas of finance today. It uses alternative techniques to acheive the same hedging as done in insurance..
vi. adjusting the probablitiy distribution of risk consideration while the discounting it at a risk free rate. it is always taken higher than the NPV rate.
vii. it is the process of identifying assessing and managing risks. it has an ultimate goal of safeguarding and protecting the stakeholders.
viii. it is the process of planning organising leading and controlling the activities as per the set instructions in order to minimise the risk of the organisation.