Identify and describe two financial management practices that firms use to manage credit risk (a) liquidity...

Identify and describe two financial management practices that firms use to manage credit risk

(a) liquidity risk;

(b) interest rate risk; and

Solutions

Expert Solution

Accounting techniques are used to manage the liquidity risk by assessing the need of collateral and cash to meet financial obligations. Another way of managing the liquidity risk is by investing in the highly liquid markets such as forex currency market. Cash flow forecasting is one of the most efficient ways to tackle the liquidity risk.

To tackle the interest rate risk, various investment products are used by the managers such as Forwards, Forward Rate Agreements, Futures, Swaps, Options, Caps, Floors, Collars etc.. Each of these products can be used in different scenarios to mitigate the interest rate risk.

The best practice to mitigate the credit risk is by knowing your customer. Thorough research should be done of the customer before giving the loan in order to manage the credit risk. Establishing a credit limit is another way to minimize the credit risks.

jeff jeffy answered 1 year ago

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