FINANCIAL RISK MANAGEMENT

FINANCIAL RISK MANAGEMENT

1. Identify the main components of foreign exchange risk

The main objective of financial risk management is to minimize the potential loss arising from unexpected changes in currency rates, credit, commodities, and equities. The risk of price volatility faced is called market risk. There is market risk in various forms. Although the volatility of prices or rates, management accountants need to consider other risks:

1. liquidity risk,

2. arises because not all products can be traded freely management

3. market discontinuities,

4. refers to the risk that the market does not always lead to a gradual change in price

5. credit risk,

6. is a possibility that the other side of risk management in the contract can not meet its obligations

7. regulatory risk,

8. is the risk arising from public authorities banned the use of a financial product for a particular purpose

9. tax risk,

10. is a risk that certain hedging transactions can not obtain the desired tax treatment
11. accounting risk, is the chance that a hedging transaction can not be recorded in addition to part of the transaction is hedged about

Management accounting plays an important role in the process of risk management. They assist in the identification of market exposure, quantify the balance associated with alternative risk response strategy, the company faced a potential measure of risk, noting certain hedging products and evaluate the hedging program.

The basic framework is useful for identifying different types of market risk can potentially be referred to as risk mapping. This framework begins with the observation of the relationship of the various market risks triggering a company's value and its competitors. The trigger value refers to the financial condition and operating performance items that affect the main financial value of a company.

Market risks include the risk of foreign exchange rates and interest rates, and commodity and equity price risk. State the source of the purchase currency depreciates in value relative to currencies domnestik State, then these changes can lead to domestic competitors able to sell at lower prices, is referred to as the risk of facing currency competitive. Management accountants have to enter a function such that the probability associated with a series of output values ​​of each trigger. Another role played by accountants in the process of risk management involves balancing the quantification process relating to the alternative risk response strategies. Foreign exchange risk is one of the most common form of risk and will be faced by multinational companies. In the world of floating exchange rates, risk management include: (1) anticipation of exchange rate movements, (2) measurement of exchange rate risk faced by the company, (3) design of appropriate protection strategies, and (4) the manufacture of internal risk management control

Potential foreign exchange risk arises when the foreign exchange rate changes also change the net asset value, earnings, and cash flows of a company. Traditional accounting measurement of the potential foreign exchange risk is centered on two types of potential risks: translation and transactions.

2. Knowing the task of managing foreign exchange risk

Main objectives of financial risk management is to minimize the potential
losses arising from unexpected changes in currency rates, credit, commodities, and equities. The risk of price volatility faced is known as market risk.

Market participants tend not to take risks. Intermediary financial services and a market maker responds by creating a financial product that allows a trader to shift the risk of unexpected price changes to others-the other side.

There is market risk in various forms, other risks:

• Liquidity risk arises because not all the financial risk management products can be traded freely. Highly illiquid market is such as real estate and stocks with small capitalization.
• Discontinuity refers to the risk that the market does not always lead to changes in market prices persist. Stock market crash in 2000 is a case in point.

• Credit risk is the possibility that the other party in the contract risk management can not meet its obligations. For example, the parties agree to exchange the euro versus the French into the Canadian dollar may fail to submit the euro on the date promised.

• regulatory risk is the risk arising from public authorities banned the use of a financial product for a particular purpose. For example, Kuala Lumpur stock exchange does not allow the use of shrot sales as a means of hedging against the decline in equity prices.

• Tax Risk is the risk that certain hedging transactions can not obtain the desired tax treatment. For example, treatment of foreign exchange losses as capital gains as ordinary income to be preferred.

• Risk is the chance that an accounting hedging transaction can not be recorded as part of the transaction hedged about. An example is when the advantage over a hedge against the purchase commitments are treated sebgaai "other income" rather than as a reduction of purchasing costs.

MANAGING FINANCIAL RISKS

The growth of risk management services that quickly shows that management can enhance shareholder value by controlling the financial risk. If the value of the company to match the present value of future cash flows, active management of potential risks can be justified by several reasons.

First, exposure management helped in stabilizing the company's cash flow expectations. Flow is more stable cash flows that can minimize earnings surprises thus increasing the present value of expected cash flows. Active exposure management allows companies to concentrate on the major business risks.

Lenders, employees and customers also benefit from exposure management. Finally, because of losses caused by price and interest rate risk of certain transferred to the customer in the form of higher prices, limiting exposure management of risks faced by consumers.

THE ROLE OF ACCOUNTING

Management accountants to help in the identification of market exposure, quantify the balance associated with alternative risk response strategy, the company faced a potential measure of risk, noting certain hedging products and evaluate the effectiveness of the hedging program.

1. Identification of Market Risk

The basic framework is useful for identifying different types of market risk that could potentially be referred to as risk mapping. This framework begins with the observation of the relationship of the various market risks triggering a company's value and its competitors. And usually referred to as cube mapping risk. The term trigger value refers to the financial condition and performance items that affect the financial operations of the main value of a company. Market risks include the risk of foreign exchange rates and interest rates, and commodity price risk and eukuitas. The third dimension of the cube mapping risk, look at the possible relationship between market risk and trigger values ​​for each of the company's main competitor.

2. Management of Potential Risks

Problems of structuring the company to minimize impacts need information about potential exchange rate against foreign exchange risks faced. Potential foreign exchange risk arises when the foreign exchange rate changes also change the net asset value, earnings and cash flows of a company. Traditional accounting measurement of the potential foreign exchange risk is centered on two types of potential risks: translation and transactions.

Potential Risk of Translation

Translational gauge potential risk of exchange rate changes impact on the domestic currency equivalent value of assets and liabilities denominated in foreign currency held by the company. For example, a U.S. holding company that operates a fully owned subsidiary in Ecuador (the functional currency of U.S. dollars) to change the dollar value of net monetary assets in Ecuador if the U.S. exchange rate changes relative to the dollar. Assets or liabilities denominated in foreign currency exchange rate against potential risks if a change in the exchange rate led to an equivalent value in the currency of the parent company changed.
Excess of assets exposed to liability risk exposure (ie items in foreign currencies are translated based on the present exchange rate) led to the position of net assets are exposed. This potential is called the potential positive risks. Devaluation of foreign currencies relative to the reporting currency translation losses caused. Revaluation of foreign currency translation profits. Conversely, if the company has a net liability position or potential exposure to downside risk if liabilities exceed assets exposed exposed. Devaluation of foreign currency translation gains cause. Revaluation of foreign currency translation losses caused.

3. Define and calculate the risk of translational

The term (risk) the risk of having a variety of definitions. Risks associated with possible events or circumstances that may threaten the achievement of organizational goals and objectives. (1978) suggested a definition of risk as follows:

Risk is the chance of loss (risk is the chance of loss).

Chance of loss related to an exposure (openness) against possible losses. In statistical science, chance is used to indicate the degree of probability will be the emergence of certain situations. Most of the authors reject this definition because there is a difference between the level of risk with the loss. In the case of 100% chance of loss, meaning that the risk of loss is definitely no.

- Risk is the possibility of loss (risk is the possibility of loss). Term possibility means that the probability of an event is between zero and one. However, this definition is less suitable for use in quantitative analysis.

- Risk is uncertainty (risk is the uncertainty). Uncertainty can be both subjective and objective. Subjective uncertainty is an individual assessment of the risk situation based on knowledge and attitude of the individual concerned. Objective uncertainty is explained in the following two definitions of risk.

- Risk is the dispersion of actual from expected results (risk is the spread of actual results from expected results).

Statisticians define risk as the degree of deviation of something of value around a central position or around point average.

The risk is believed to be unavoidable. With regard to the public sector which demands transparency and performance improvements with limited funds, the risks faced by government agencies will be growing and increasing. Therefore, an understanding of risk than ever to be able to determine priorities and program strategies in the achievement of organizational goals.

Risk can be reduced and even eliminated through risk management. The role of risk management is expected to anticipate the rapidly changing environment, developing corporate governance, to optimize the preparation of strategic management, securing resources and assets of the organization, and reduce the reactive decision making from top management.

4. Define and calculate the risk of the transaction

Operational risk management is an integral part of bank risk management. Risks caused by and associated with business activities should be identified, assessed and measured and mitigated and controlled by the bank board. Management of those risks is intended to minimize potential losses and potential threats to the bank's reputation.
Different nature of operational risk with credit risk and market risk because of losses caused by events that are exposed to operational risk can not always be measured. Loss may occur after a certain period for example, or indirectly through damage to the reputation or image of the bank.

 Definition of Gross Income (Gross Income)

Gross profit is defined as net interest income (interest income minus interest expense) income plus net non-interest (operating income minus interest expenses beyond the outside interest).
Gross profit should be:

1. gross of fees (eg for unpaid interest);

2. gross of operating expenses include the costs paid to outsourcing service providers; (As opposed to the fees paid for services that are outsourced, the income received by banks that provide outsourcing services, should be included in the classification of gross profit).
3. does not include profit / loss realized from the sale of securities included in the banking book; (gains / losses can be realized from the securities that are classified as 'held to maturity and' available for sale, which are characteristics included in the banking book, also excluded from the definition of gross income), and

4. excluding extraordinary items (extraordinary) or irregular, and the income derived from insurance.

5. Knowing the differences in accounting risk and economic risk

Market risk is the risk of loss arising from unexpected changes in currency rates, credit, commodities, and equities. For example: A company in Sweden that issue new shares for domestic investors might view as the market risk exposure to rising stock prices. The price increase is not unexpected separation is not desirable if the company issuing the shares should be issued a number of shares less to obtain the same amount of cash by delaying the issuance of stock for a while. On the other hand, a Swedish investor will look at the risk of a possible decline in equity prices. If stock prices dropped significantly in the short term, investors would be better to wait a bit before making a purchase.

Actively hedge against the potential financial risks are not generally accepted among financial managers around the world. Some thought that keuangansecara management alone will not able to increase the value of the company and that company better manage its core business risks and allowed himself to be exposed by some (if not, all) financial risk.
forecasting foreign exchange rates is something that is not useful. You can not predict how the market, so you should not try. Because, disebuah world with freely fluctuating exchange rates, forex market can be said to be efficient. Current market exchange rate (ie the forward exchange rate) menunjukkna the consensus of all players on the foreign exchange market in the future. The information is generally available immediately realized in foreign currency exchange rate now. Thus, the information is not very valuable in predicting future exchange rate. In this condition, changes in foreign currency exchange rate is a random response to new information or unexpected events. Forward exchange rate is the best estimate available for exchange in the future. Random changes in exchange rates on foreign currency exchange rate reflects the differences of opinion among market. Influence on the management accountant is an accountant must develop systems that collect and process information and accurate kompherensif the variables related to exchange rate changes, the financial manager must also understand the consequences of peramalannya.

6. Knowing the exchange rate hedging strategies and accounting treatment required

The main objective of financial risk management is to minimize the potential loss arising from unexpected changes in currency rates, credit, commodities, and equities. The risk of price volatility faced is called market risk. There is market risk in various forms.
Although the volatility of prices or rates, management accountants need to consider other risks:
(1) liquidity risk arises because not all products can be traded independently of management,

(2) market discontinuities, refers to the risk that the market does not always lead to price changes gradually,

(3) credit risk, the possibility that the other party in the contract risk management can not meet its obligations,

(4) regulatory risks, the risks arising from public authorities banned the use of a financial product for a particular purpose,

WHY IS MANAGING FINANCIAL RISKS

First, exposure management helped in stabilizing the company's cash flow expectations. Active exposure management allows companies to concentrate on the major business risks. The providers of shareholders, employees, and customers also benefit from exposure management. Lenders generally have a lower risk tolerance than the shareholders, thereby limiting the exposure of companies to balance the interests of shareholders and bondholders.

THE ROLE OF ACCOUNTING

Management accounting plays an important role in the process of risk management. They assist in the identification of market exposure, quantify the balance associated with alternative risk response strategy, the company faced a potential measure of risk, noting certain hedging products and evaluate the hedging program.

The basic framework is useful for identifying different types of market risk can potentially be referred to as risk mapping. This framework begins with the observation of the relationship of the various market risks triggering a company's value and its competitors. The trigger value refers to the financial condition and operating performance items that affect the main financial value of a company. Market risks include the risk of foreign exchange rates and interest rates, and commodity and equity price risk. State the source of the purchase currency depreciates in value relative to currencies domnestik State, then these changes can lead to domestic competitors able to sell at lower prices, is referred to as the risk of facing currency competitive. Management accountants have to enter a function such that the probability associated with a series of output values ​​of each trigger. Another role played by accountants in the process of risk management involves balancing the quantification process relating to the alternative risk response strategies. Foreign exchange risk is one of the most common form of risk and will be faced by multinational companies. In the world of floating exchange rates, risk management include: (1) anticipation of exchange rate movements, (2) measurement of exchange rate risk faced by the company, (3) design of appropriate protection strategies, and (4) the manufacture of internal risk management controls. Financial managers must have information about the possible direction, timing, and magnitude of changes in exchange rates and to develop adequate defensive measures more efficiently and effectively.

ACCOUNTING TREATMENT

FASB issued FAS No. 133, which were clarified by FAS 149 in April 2003, to provide a single, comprehensive approach to accounting for derivatives and hedging transactions. Basic provisions of this standard are:

- All derivative instruments be recorded on the balance sheet as assets and liabilities,
- Gains and losses from changes in fair value of derivative instruments Would not assets or liabilities,
- The hedge must be highly effective in order to deserve a special accounting treatment, ie gains or losses on hedge instruments niai exactly offset gains and losses should be something that protected the

- Hedging relationships must be documented in full for the benefit of the report pemvaca
- Profit or keruhian of net investment in foreign currency initially recorded in other comprehensive income

- Gains or losses on hedges of future cash flows are uncertain, such estimates of export sales, are initially recognized as part of comprehensive income.

Although the rules guiding the FASB and IASB issued has a lot to clarify the recognition and pengukuan derivatives, there are still some problems. The first relates to fair value. The complexity of financial reporting have also increased if the hedge is deemed ineffective to offset foreign exchange risk.

7. Understanding of accounting and control problems, related to risk management of foreign exchange

Running a business in a global environment requires management to change its perspective. There are many common aspects of the business on a local and global scale. However, some of which are different. Companies operating in the country of origin and other states may find that running a good business practice in the country of origin was not applicable in other countries. Much of this difference is related to the business environment is the environment of culture, law, politics, and economics of each country.

In the world of global business requires management accountants to handle finances and daily business operations. Good practice, education, and stay abreast of the changes is important for an accountant. However, the task of the management accountant international company is more complex due to the continuous changes occur in global business. Because the main task of the management accountant is to provide relevant information to management and to be able to follow developments applicable, the management accountant should read various books and articles on business information systems, marketing, management, politics, and economics. In addition, management accountants must be familiar with accounting regulations of the country where it operates.