Foreign Exchange Risks

Foreign Exchange Risks

Overview

A typical business environment is characterized by numerous risks. These manifest themselves as dangers which result following enactment of specific business decisions. These apparent dangers may affect the business in a manner so dire that in some cases, it is virtually impossible for the company to rise back on its feet (Graham, Kaye & Rothstein, 2006)). A good example is a a business idea that involved investing all assets collected within a particular business department. The investment might have been miscalculated and fewer returns gained in the process, as a result, the business faces bankruptcy and may even become obsolete in the process. In a regular conventional business, there exist certain types of dangers or hazards that serve to affect the operation adversely (Graham et al., 2015). For instance, change of tastes, changes in political or governmental approach, increased rivalry, inclinations of purchases, the poor state of the economy and a mass decrease in buying power. These issues usually require a substantial investment to overcome the challenges. The business may collapse into the brink of obsolescence. According to Green (2013), aach business has its own particular set of issues which affect its current market state. The dangers may impact the business in the local or worldwide market. When it does influence the worldwide market, the dangers lead to a significant degree of loses. It is important to note that the dangers and risks which affect the business can be broadly classified into two categories, inherent hazards which affect the business alone and external factors which affect the business from its environment.

Business Risks

The business risks are classified into various categories depending on the business itself and the sectors affected. In light of this fact, they are divided into the following depending on the mentioned criterion.

Operational Risks

Operation risks, as the name suggests, emerges during the business operations or working procedures that form part of everyday business practices (Duckert, 2011). It is believed that operational risks mainly emerge in the process of delivering managerial counsel and similar matters. Operational dangers such as an error in record keeping can mess up the business considerably in light of circumstances (Duckert, 2011). A medical employee who mixes up the records for two different patients may end up potentially killing the involved parties since the treatment received will not be effective toward the ailment. In some cases, the wrong treatment may be fatal to an extent that death may ensue. Such is the illustration of the potential dangers of succumbing to an operation based risk.

Vital Risk

When the dangers of the apparent business are viewed as a result of failure to meet individual targets and objectives, the risk involved is termed as a vital risk. This refers to the possibility that a strategy in a specified market fails to meet expectations undertaken during a previous time period (Green, 2013). The possibility of business operations failing to provide the expected outcomes is referred to the vital risk. A vital or key risk, which often is as a result of miscalculation may render the business obsolete in a number of hours. Operational planning should take into account the dangers of the business failing to meet the threshold at specific points and plan accordingly.

Representative Related Risks

The risks which are related to the representatives mainly cover the workers or the workforce in a company. These risks primarily encompass the lack of proper work output from the employees. Poor work output dangers are numerous in light of circumstances. They may lead to the downfall of the business. Other risks which form part of the risk (other than poor work output) include employee sickness or unethical practices by the workers (Green, 2013). The unethical practices may tarnish the business reputation. Representative risks are hence the possible dangers that may arise because of workers or other representatives of the firm in question, for example, shareholders.

Consistency Risks

Consistency risks are the possible dangers which may occur as a result of inconsistency. For example, the nation laws affecting business practices may change for better or in this case for the worse (Green, 2013). A proper example is the taxation policy. If the related tax laws warrant an increase in the amount of tax payable as per a business corporation, the business itself is likely to suffer a significant deficit in the revenue. If the law bans a product that a company is extensively producing, for instance, cigarette smoking, a company which deals with tobacco processing is likely to face obsolesce. Consistency risks are the worst ones since they cannot be planned for; when they hit, they hit hard.

Ecological/ Natural Risks

These are the types of dangers which may occur as a result of unforgiving weather conditions or natural phenomena. A good example is an earthquake. The catasprophe destroys infrastructure which most businesses are built around. The effects due to ecological or environmental factors may be direct or indirect. For example, a storm which may cause a number of people to suffer from colds or the flu might affect the ice cream business. This is an instance of an indirect effect. A tsunami causing deaths and destruction of infrastructure is an example of a direct effect (Green, 2013). Planning for this risk involves choosing a suitable business location. A good deal of groundwork needs to be undertaken to establish the net stability of the site and the susceptibility of environmental hazards. Since Japan is an active earthquake and tsunami point, starting a business in this environment involves a great deal of potential planning and choosing a more lucrative location.

Mechanical Risk

Mechanical risks, as the name suggests, pertain to possible dangers which may occur as a result poor or lack of proper business innovation. According to Duckert, (2011), an ineffective manager may not take into account the various innovation which may be present outside a specific business and focus on the internal aspects. This is a particularly disadvantageous in light of a competitive business environment since the ones who fail to invest in innovation from various sources are likely to undertake business more efficiently (Duckert, 2011). A perfect example is a scenario involving two different mobile phone manufacturing companies. If company A sticks to the way it has been manufacturing phones without adding any new features, the customers lose interest over time. If company B on the other hand, carefully observe how other external companies build their phones and try to incorporate the good features, the other companies have, into their products, the chances of success are high.

Risks Related to Safety and Wellbeing

These are the kinds of risks associated with matters which are mostly out of a person’s control.  A good example is health. A person in most cases is never acutely aware of their medical condition and may fall sick without notice. Such a risk will serve to affect the business negatively in light of prevailing circumstances. If a good number of employees succumb to the same illness as a result of matters such as a disease outbreak, the overall workforce is likely to be adversely affected, and business operations may even come to a complete standstill (Duckert, 2011). Other wellbeing risks and danger include attacks by robbers or stealing of vital information which is related to the company in question. Although it is relatively difficult to predict happenings of situations which serve to put one’s well-being at stake, they can coherently be planned for to reduce their chances of occurrence. For instance, workers may extensively visit the doctor for check-ups. The company makes this easier by regularly providing free check-ups for a matter of time.

Economic (Money-Related)

These risks are involved with the current state of the economy. Such are the types of risks which are unexpected. One can never fully plan for such in case the danger strikes. The price of fuel, for instance, affects a great deal of the economy (Duckert, 2011). A hike in fuel prices also results in a rise in entities which use fuel for various purposes. The processing companies whose mechanical systems need oil for greasing and lubrication are perfect examples. The companies might also need fuel for operating the various machinery in question. A rise in fuel prices will result in an increase in production cost which will make the company hike its product prices to cover the costs. Such is the effect of the poor economy toward business practices.

Risk Estimation Techniques by the Organizations

The risks estimation techniques refer to the various methods and means which can showcase the possibility of the business facing certain risks and the extent of damage covered as a result of facing those risks. In essence, there a variety of ways which risk can be estimated depending on the business itself (Duckert, 2011). The estimation of business risks mainly refers to the techniques used to investigate the impact of dangers which the company is likely to face. The various methods include.

Measuring Risk in Relation to Salary Paid

In this context, a company may look into a particular time period and estimate the salary fluctuations as per that time. As already explained above, a poor or unstable economy may lead to a net increase in the cost of production (Duckert, 2011). In order to meet this net increase, various acts are undertaken to meet the higher cost. One of the most common practices include reducing the employee’s salaries. The business might hence look over the period when the salaries were reduced and mark it as “the period of economic danger.” The business organization may then move on to look at the specific key factors at play during the time period and hence use the data to estimate when the risk might occur again (Duckert, 2011). The degree of decrease and increase of the worker’s salary may be used to showcase the overall seriousness of the risk in question.

Interest for organization’s product

This is another quantifiable aspect which may be used to measure the degree of risk or dangers a business may succumb to. The business may again look to a particular time period when the demand for their products went extremely small, for instance, the price of heavy winter based clothing in the summer. A period characterized by low demand also results in a decrease in salaries of the employees and a reduction in production in general (Duckert, 2011). In essence, the degree of wage decrease or the percentage of reduction in demand can be used as the monetary estimate of the risk. The number obtained will be dubbed as “the risk of keeping the regular production rate at period X (the period where the net demand for the product fell below standards).

Global Initiatives in Risk Management

Risk, as already discussed above, is faced by various companies each day. As a result, various initiatives have been put across to mitigate the extent of the dangers as a consequence of these risks, they include;

Upgraded Financial Risk Limits

This was a global implementation which required the members of a particular organization (board of governors) to establish a potential money draining activity in their operations and try to minimize it (Duckert, 2011). This was an initiative aimed basically to counter financial risk which affects many companies. The exercises were to be stopped for a while, and the overall risk assessment was to be made thereafter.

Reporting of Financial Risk Information

According to insight, the procedure to report financial risk was enacted based on worldwide budgetary emergency. As the name suggests, various companies and models were required to report information which had led to them possibly succumbing or openly facing a based financial risk. The information would be used by other companies such that they may avoid similar happenings and thus safely avoid suffering the same danger related to the risk. This initiative was largely successful. Many organizations and associations managed to avert financial risks.

References

Duckert, G. (2011). Practical enterprise risk management: a business process approach. Hoboken, N.J: Wiley.

Green, B. (2013). Risk Behavior and Risk Management in Business Life. Dordrecht: Springer Netherland

Graham, J., Kaye, D. & Rothstein, P. (2006). A risk management approach to business continuity: aligning business continuity and corporate governance. Brookfield, Connecticut: Rothstein Associates Inc.

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