Question

In: Finance

You are a financial specialist, the first one hired for a pool set up to offer...

You are a financial specialist, the first one hired for a pool set up to offer insurance to construction companies in your city. The pool you work for takes in approximately $50 to $55 million dollars in premiums to provide workers compensation insurance for the members. In the past, the pool has hired a third party that has taken the money and invested it for the firm, making sure the money to pay claims is available, but at the same time making sure the money is not just sitting in a bank, but invested to provided additional capital to the pool. The contract with the third party administrator will expire in six months. The pool hired you to help them better understand the risks their financing activities represent. The leaders of the pool know that you have to invest the money to make money, and want the investments to be aggressive, but not too aggressive, so the pool will have money to pay claims in a bad year. They want to understand the balance between too passive and too aggressive an investment strategy.

Although you need to follow APA in your report, explain the information you’d pass on to the pool’s management. Explain what types of financial (speculative) risks their organization has. Explain to them countermeasures that can be taken to mitigate or eliminate these threats. Explain what you see as the top five threats that the pool faces from a financial risk management standpoint.

Solutions

Expert Solution

The firm should invest the surplus to generate the investment income. Suggested investment instruments are:

  • Liquid funds
  • Mutual funds
  • Stock markets
  • Bonds

Needless to say, each of the instruments specified above has its own share of risks. Collective risks the firm is exposed to are:

  1. Interest rate risk
  2. Inflation risk
  3. Political stability
  4. Capital market risks
  5. Economic stability of the country
  6. Foreign exchange risk
  7. Regulatory risk

The best way to take care of these risks will be to:

  • Build a diversified portfolio of the instruments talked about
    • Investments in liquid funds will allow the firm to take care of periodic claims and administrative expenses
  • Hedging using derivatives

Top five threats:

  • Loss in capital value: The investment value falls below the book value. This may be due to lack of stability in capital markets or interest rate
  • Natural disasters or force majeure events leading to drastic increase in claims in a particular year: investments may have to be redeemed pre mature to take care of the excess claims.
  • Political instability of any kind
  • War
  • Terrorism

Related Solutions

You have been hired as an IT expert by a small firm to set up an...
You have been hired as an IT expert by a small firm to set up an office for 20 staff members, half of whom will work with desktop computers and the remaining with laptop computers using wireless networks. The office would use one networked laser printer, accessible from both the desktop and laptop computers. The desktop computers will use a wired network, while the laptop computers will employ a wireless network to print and access the internet. Start making a...
Set up - You were hired in the role of accounting lead a couple of years...
Set up - You were hired in the role of accounting lead a couple of years ago by a privately held company. You report directly to the CEO. The company sells its products through a dealer distribution network. Revenue is booked at the time shipment occurs. Under standard practice, revenue will be booked as of the last day of the month if the shipment will occur within 1 or 2 days of the new month. On occasion, revenue may be...
Construct a set of 12 bulleted guidelines as a financial specialist to enable my agency to...
Construct a set of 12 bulleted guidelines as a financial specialist to enable my agency to implement each of the five principles of privacy: confidentiality, access,a anonymity, security, and abridgement
You are hired as a financial manager and your first task is to establish the cash...
You are hired as a financial manager and your first task is to establish the cash budget of your firm. You gathered the following information. The firm receives all income from sales Sales estimates (in millions) Q1 = 1,000; Q2 = 1,250; Q3 = 1,500; Q4 = 2,000; Q1 next year = 1,200 Accounts receivable Beginning receivables = $3000 Average collection period = 45 days Accounts payable Purchases = 60% of next quarter’s sales Beginning payables = 1,200 Accounts payable...
Widget Inc. is just starting operations. Following are the first week’s financial transactions. Set up the...
Widget Inc. is just starting operations. Following are the first week’s financial transactions. Set up the ending B/S and the period I/S for Widget Inc. Sell $10,000 worth of common stock Buy 10 widgets for $100 Purchase $1,500 worth of equipment Sell 5 widgets at $150 each to Smith on credit Buy $10 widgets on credit from Jones Supply for $100 each Borrow $500 from National Bank and Trust Pay wages of $100 Pay federal tax of $20 Pay rent...
You have been hired as Financial advisor by Texas Corporation and the first task that is...
You have been hired as Financial advisor by Texas Corporation and the first task that is assigned to you is to help the company determine its optimal capital structure. a) What factors will help you in determining the optimal structure for Texas Corporation. b) From the financial statements of the company you have discovered that company has a very high operating leverage. How is it effecting the firm's profitability? c) The company is in a higher tax bracket defined by...
When you set up your first Windows 2016 server and configure it as a domain, there...
When you set up your first Windows 2016 server and configure it as a domain, there are a few things to consider. There are points where it is relatively easy at points, as you just answer a few questions like what language you use, your keyboard, etc. At other points, it becomes more involved. what do you think would be a good name for your server(s) and why? What about server password security? What are some things to consider when...
Imagine you, a Certified Health Education Specialist (CHES) has been hired as the program director of...
Imagine you, a Certified Health Education Specialist (CHES) has been hired as the program director of a new after school program called "Get Healthy". "Get Healthy" is focused on educating the importance of increasing physical activity among elementary children as well as educating the importance of consuming a healthy diet. You are required to develop the program's mission statement, program goals, and program objectives before the program begins. 1) Provide 1 program mission statement for the"Get Healthy" program 2) Provide...
Case study Last month you were hired with the title Health Informatics Specialist at an independent...
Case study Last month you were hired with the title Health Informatics Specialist at an independent community care hospital with 350 beds. The hospital includes a comprehensive outpatient clinic, a rehabilitation center with both inpatient and outpatient services, a cardiac care center, and an emergency room. In addition, four family health centers are located throughout the community. More than 930 primary care and specialty physicians are associated with the hospital, which has a staff of just over 2000 employees. The...
You were just hired as an accountant for ABC Company. One of your first assignments is...
You were just hired as an accountant for ABC Company. One of your first assignments is to verify the fixed asset listing to ensure the assets listed are owned by the company, are physically located in the building, and are being depreciated appropriately. In the process of verifying the location of all the fixed assets on the listing, you could not help but notice there were significant fixed assets present in the company that were not on your list. You...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT