Question

"Risk Management" Please respond to the following: Assess the current market risk in the U.S. and Foreign Markets, indicating how a financial manager is likely to react given the risk level determined. Provide support for your answer. Considering the market risks of interest rate, foreign exchanges, and commodity price risk, assess the risk that you believe may have the most significant impact on a firm. Indicate how this risk can be managed effectively to minimize the effects of this risk.

Answer 1

The current market risk in the U.S. and the Foreign Market is very high due to certain developments. U.S. economy is now heavily dependent on industries that depend on low interest rates. The economic growth rate depends on interest rate sensitive sectors and this makes the market highly risky in nature. Secondly the recent trade and tariff tensions between USA and China have started to hurt corporate earnings and profitability at a broader level and this has dampened the economic activity on an overall basis. This has increased the level of market risk both in USA as well as other foreign markets. Market risks always show a lag and feedback effect and so the headwinds from events of 2018 has increased the overall levels of market risk both in USA as well as in other foreign markets. A financial manager will react with caution and will carefully undertake all capital budgeting decisions, financing decisions and expansion decisions. This is because the financial managers would like to keep their exposure low so that the damages are minimized when market risks start displaying rapid volatility.

The risk that will have the most significant impact on a firm is the market risks of interest rate. As already pointed out the economic growth rate in USA depends on interest rate sensitive sectors and so risks of interest rate is the most significant risk now. In fact risks of interest rate are so strong and volatile now that it is driving other risks as well like foreign exchange risk as well. This risk can be managed effectively by properly measuring their interest rate risk by doing sensitivity analysis, repricing profiles, and removing any form of maturity mismatch in their balance sheets.