What is Risk Management?


Risk Management is traditionally seen as a process designed to avoid or I eliminate risk.
However, due to the fundamental link between risk and return, (profit is a reward for risk)
the total avoidance of risk may not necessarily be in the best interest of the organisation.
Thus, a risk management system must allow the management to deliberately accept risk
such that the risk- return profile is consistent with its overall objectives. It should
encourage the management to focus on its profitability goals vis-a-vis its risk taking
capacity and the associated worst case loss. Risks associated with Foreign exchange
dealing activity can be effectively managed so long as all risks are identified; measured
and necessary controls are instituted.
The peculiarities of foreign exchange markets which result in risk :
 It operates as an over the counter market which implies exposure to credit risk.
 It is the only market which operates 24 hours a day which means that every open
position is exposed to periods when it cannot be controlled.
 It is a multi-location market with no entry / exit barriers therefore competition is a
variable factor. This results in market risk.
 Exchange rates fluctuate almost continuously which is the basis of rate risk.
 Other markets such as money, capital and debt markets also impact foreign
exchange rates. Effectively there are too many intangibles other than demand –
supply elements that get factored into exchange rates.
 Control measures and policies adopted by respective governments also affect foreign
exchange rates. This is a variation of Country risk.
 Settlement of a foreign exchange transaction normally does not take place zone risk.
simultaneously i.e.: the currencies are exchanged on the same calendar day but at
two different times due to time zone factors. This results in time zone risk.

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MT UVA- University, Vocational and Affiliated Education for BMS