Financial Risk Management Harvard Case Solution & Analysis

Question 1

How much disclosure of embedded risk is required or even desirable for opaque, actively managed institutions?

The discourse of embedded risk is significantly important in order to effectively manage the financial institutions. But extend of embedded risk discourse is mainly depend on the business operations and procedures adopted by the companies or financial institutions. It differs and varies from company to company as each has its own way of carrying out daily basis business activities.

Embedded risk disclosure is now becoming an integral part of financial institutions as they are focusing on their embedded risk in order to successfully overcome the risks they face during businesstransactions, trading of futures and equity transactions. It is greatly important to create the awareness among employees in the company or financial institution regarding embedded risk at all the level so, that it will allow to reduce their risks that otherwise may result in higher business costs, financial risk and other business related risks. Moreover, it is challenging to determine risk exposure and its management for opaque, actively managed institutions as it is not easy to evaluate their value or embedded risk due to their business processes and systems management(Rosnadzirah Ismail, 2013).

However, disclosureof embedded risk for opaque, actively managed institutions may also depends on the capability and capacity to accept the level of risk .As well, their approach towards the risk management also important fordisclosureof embedded risk. In addition to this, the earnings of the institutions are also playinga significant part to determine the embedded risk disclosure for actively managed institutions as earnings greatly impact the risksof increasing the efficiency of the business and also affected by the different business related risks. The need is to understand the current situation of institutions and also to consider possible improvements that assists in embedded risk management(Peck, 2003).

For embedded risk, it is very vital for opaque and actively managed institutions to create attentiveness at every level of their system and business process that will help them to determine their facilities and skills for embedded risk disclosure. The desirabledisclosure of embedded risk must be based on the complexity and difficulty that actively managed institutions face throughout their business dealings. Nevertheless, amount of threat that actively managed institutions can meritoriously and efficiently coped in their business operations can be the required disclosureof embedded risk.

 For embedded risk disclosure,it is necessary to disclose each risk separately that a company faces while proceed their operations.The first risk is that a company faces from the unique nature of its industry along with political and interest rate risks in the industry. The other risk is the risk related to its operation that includes management inefficiency and production inefficiency of the company that is uniquely related to company operations.Anotherrisk that a company faces is the financial risk that the company faces due to its debt to equity structure(Hamid Mehran, 2012).

With changing portfolios, should risk management strategies be disclosed in addition to current risk profiles?

 Yes, risk management strategies should disclosed in addition to current risk profiles with changing portfolios as risk management strategiesneed modifications based on the variation in the portfolios. The risk management strategies are important not only at strategic level, but also at all management levels as they greatly impact the ability of institutions to endure the risks.

 The change in the portfolios also requires changes in the risk management strategies by a company or financial institution due to the fact that the level of the risk changes with the variability and fluctuation in the portfolios. Therefore, it is necessary to disclose risk management strategies, including current risk profiles of the portfolios managed by institutions. This will help the financial institutions and companies to estimate the expected risk from the changing portfolios that reduces the chances of risk and increase probability to maximize the expected profit from the altering portfolios(H. Kent Baker, 2013).

  Risk Management strategies need modification with shifting portfolios as it allows the institutions to determine the profit and loss over thespecified time horizon of the portfolios. The company must disclose their current and upcoming risks that company faces due to change in their investment portfolio. The stakeholder needs the accurate and detail information for the changing risk scenario in the company’s portfolios to have a better understanding of their investment security and return in accordance with the company risk..............................................

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