Risk management is means ‘The process of understanding and managing the risks that the organization is inevitably subject to in attempting to achieve its corporate objectives’ – CIMA Official Terminology.
Financial Risk- Risk of change in a financial condition such as an exchange rate, credit rating of a customer, or price of a good’.
Credit Risk- Risk of nonpayment or late payment of receivables which would be controlled by implementing efficient and effective strong credit control policy.
Interest Rate Risk- It is the risk gains or losses on assets and liabilities due to changes in interest rates. In our case it would not apply as we shall not take loan or financing.
Currency risk- Risk that arises from possible future movements in an exchange rate it has further three categories and two are relevant for us:
- Economic risks- Risk of change in economy, home or abroad, which can affect value of transaction. Example, Exchange rate movements can make Company’s products more or less expensive. We shall attempt to manage this risk by engaging with suppliers and customer from various parts of the world to reduce effects of adverse movement in exchange rates.
- Transaction Exposure- is the possibility of incurring gains or losses, upon settlement at a future date, on transactions already entered into and denominated in a foreign currency. Therefore, the amount of cash flows involved in exchange transactions of the firm are exposed to currency rate fluctuations. This shall be addressed by using appropriate hedging strategy.