Question

a) Outline the main financial risks exposed by commercial banks and their implications on the value of the bank?

b) The outbreak of Covid19 has created significant volatility in the value chain of the consumer goods industry and thus impacting the value. Critically, assess the potential impact on the financial risk parameters of a company operating in that space?

c) What are the measures that can be set in place by FMCG Companies to manage foreign exchange rate risk?

Answer 1

(a)

The main financial risks that commercial banks are exposed to comprise operational risk, credit risk, liquidity risk, and market risk. Credit risk is one of the major and greatest risks that the bank or the financial institution has to face and it comes to the picture when the borrowers involved with the bank fail to meet up their financial and debt obligations for the bank. The borrowers who tend to default on their interest payments and principal payments tend to default generally adds up to the credit risk of the bank. Operational risk can be termed as the risk that comes into picture when loss in the value of bank happens due to the errors made in following the banking process and procedures. The market risk can be defined as the risk that happens due to the banking activities done in the capital markets. If their is an adverse movement in the capital markets and the banks have made substantial investment in it then the banks can collapse or the severity of the market risks can rise to make bank loose a lot on its overall value.

 

(b)

The financial risk that rose in the consumer good space in the era of covid-19 era came into the picture when the business supplied consumer goods but were unable to collect the money from the customers for the good supplied. The covid-19 era resulted in massive job loss and it raised in high level crisis. Due to lack of money, the people lost the capability to afford the consumer goods and this made them default on the payments that they were suppose to make to the consumer good business. Hence consumer good business faced acute levels of default or credit risk.

 

(c)

The foreign exchange risk can be defined as the potential losses that comes into picture when there are losses resulting from international financial transactions due to adverse movements in the currency rates. The foreign exchange risk is to be beared by the fmcg companies and investors who work in the export and import of the international products .In order to reduce the foreign exchange rate risk, the fmcg can undertake currency forward rate agreements and currency options. Such derivative contracts should be used to develop natural hedge between the corresponding and equivalent opposite transactions.