Question

As a risk manager for XYZ corporation, you are assessing the firm’s various risk exposures to include in a regular semi-annual report to upper management.

XYZ is a medium-size import/export firm located in Cambridge, UK. Its primary sources for imports, which it sells in the UK and Eurozone, are located in China and Vietnam. It has customers throughout the world, but more than half of its exports go to Africa. XYZ customarily borrows to cover funds tied up in exports.

Further, XYZ has recently launched its own online B2B (Business-to-Business) platform.

Q1. Identify seven types of risk exposures you should report and provide a brief explanation for each risk exposure.

Q2. Suppose the firm’s board needs your views on the trade-off of hedging against the identified risks.

Briefly discuss what kind of value can be generated by risk hedging, when risk hedging is most likely to generate value and when it is least likely to do so.

Answer 1

Answer: 1   seven risk exposure are as follows-

1- Personal Loss Exposures—Personal Pure Risk

   Exposure to premature death, sickness, disability, unemployment, and dependent old age are examples of personal loss exposures when considered at the individual/personal level. An organization may also experience loss from these events when such events affect employees. For example, social support programs and employer-sponsored health or pension plan costs can be affected by natural or man-made changes. The categorization is often a matter of perspective. These events may be catastrophic or accidental.

2- Property Loss Exposures—Property Pure Risk

Property owners face the possibility of both direct and indirect (consequential) losses. If a car is damaged in a collision, the direct loss is the cost of repairs. If a firm experiences a fire in the warehouse, the direct cost is the cost of rebuilding and replacing inventory. Consequential or indirect losses are nonphysical losses such as loss of business. For example, a firm losing its clients because of street closure would be a consequential loss.

3- Liability Loss Exposures—Liability Pure Risk

The legal system is designed to mitigate risks and is not intended to create new risks. However, it has the power of transferring the risk from your shoulders to mine. Under most legal systems, a party can be held responsible for the financial consequences of causing damage to others. One is exposed to the possibility of liability loss (loss caused by a third party who is considered at fault) by having to defend against a lawsuit when he or she has in some way hurt other people

4- Catastrophic Loss Exposure and Fundamental or Systemic Pure Risk

Catastrophic risk is a concentration of strong, positively correlated risk exposures, such as many homes in the same location. A loss that is catastrophic and includes a large number of exposures in a single location is considered a nonaccidental risk. All homes in the path will be damaged or destroyed when a flood occurs. As such the flood impacts a large number of exposures, and as such, all these exposures are subject to what is called a fundamental risk.

5- Accidental Loss Exposure and Particular Pure Risk

Many pure risks arise due to accidental causes of loss, not due to man-made or intentional ones (such as making a bad investment). As opposed to fundamental losses, noncatastrophic accidental losses, such as those caused by fires, are considered particular risks. Often, when the potential losses are reasonably bounded, a risk-transfer mechanism, such as insurance, can be used to handle the financial consequences.

6- Diversifiable and Nondiversifiable Risks

another important dichotomy risk professionals use is between diversifiable and nondiversifiable risk. Diversifiable risks are those that can have their adverse consequences mitigated simply by having a well-diversified portfolio of risk exposures. For example, having some factories located in nonearthquake areas or hotels placed in numerous locations in the United States diversifies the risk. If one property is damaged, the others are not subject to the same geographical phenomenon causing the risks.

7- Enterprise Risks

enterprise risk management is a key current concept today, the enterprise risk map of life insurers is offered here as an example. Operational risks include public relations risks, environmental risks, and several others.

Answer-2

he best way to understand hedging is to think of it as a form of insurance. When people decide to hedge, they are insuring themselves against a negative event's impact to their finances. This doesn't prevent all negative events from happening, but something does happen and you're properly hedged, the impact of the event is reduced.

In practice, hedging occurs almost everywhere, and we see it every day. For example, if you buy homeowner's insurance, you are hedging yourself against fires, break-ins, or other unforeseen disasters.

in this mainly two risk involves Market Risk,The Risks of E-exposures.

its generates the value when it is does for creating the value of shareholders.whereas whwn it does for own purpose its creates a least value.