Question

I am supposed to read chapt. 7 and 8 about bond valuation and risk this week . My assignment due wed is this . .. To prepare for this Discussion, consider your organization or one with which you are familiar, and its current riskiness. Develop an idea for a new product or service that has the potential to generate a good return on investment at reasonable or even high stand-alone risk but that has an opportunity to lower the organization's overall risk. Develop an argument as to why your suggested project has the potential to reduce the organization's overall risk. Be sure to identify at least two risk measurement tools used in the readings that you would deploy to measure the overall risk in the organization, and explain why your choices are appropriate for the situation. I'm not sure what he wants.. can anyone help

Answer 1

Answer: -

The organisation is in discussion is a Capital Market Intermediary. As an intermediary, it has limited revenue and maximum fixed cost, hence a stable revenue generated over long period of time. The intermediary is going through competitive environment and stable revenue generation would soon become cause of concern in one aspect riskier. It tried to add value added services to enhance revenues but it only generated single figure incremental revenue. Company was citing over a period of 3-4 years the stable revenue and increasing percentage in fixed cost would erode their profits and they would move in loss. The company is slowly and steady moving towards loss making enterprise and it is identified as risk as no further revenue enhancement opportunities or cost reduction opportunities to keep the enterprise profitable is available with company.

Company Leaders organised meetings to arrive at mitigation and contingency planning for the risk. Company leaders came up with few mitigation plan and arrived at few diversification opportunities present in market but it was utilisation of market intermediary skill set of company to other financial market opportunities. 3-4 projects were selected by company with investment taken from companies 'reserves and surplus' account which was duly passed by board and investors. The return on investment from all the projects where additional revenue generation for the company and payback periods where of 3-4 years including the project initiation phase. The probability of failure was 25-35% and probability of success ratio was 65-75% which was considered higher in financial market.

Risk Mitigation from new strategy: -

• The project year of returns was nearly matching the years when the company would be starting to make loss, hence the loss-making timeframes could be covered by the new project being profitable.
• The project utilised company's existing skill set, company need not have to develop new skill hence company need not have to hire new resource but utilise existing resource thereby enhancing resource utilisation and project cost too.
• Reduce cost also contributed to early payback period from projects which provided organisation support during start of loss generation from core operation.