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8/8/2019 Corporate Strategies for Managing Environment Risks
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8/8/2019 Corporate Strategies for Managing Environment Risks
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OUTLINE
INTRODUCTION
METHODS OF ASSESSING BUSINESS RISK
COUNTRY RISK ANALYSIS
POLITICAL RISK ANALYSIS
CORPORATE STRATEGIES FOR MANAGING
EVIRONMENTAL RISK
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Types of Business Risk
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Legal Risk
Arising from legal challenges or changes in law
(Law regulating Carbon emission)
Regulatory
Risk
Arising from regulatory design and its changes
(Law against converting forest land into realestate)
Political Risk Resulting from political changes (Coca-colabeing ousted when BJP came to power)
Social Risk
Emanating from social attitudes (The English
church objecting to outsourcing software jobs toIndia)
Direct
Environment
Risk
Resulting from those environmental risks that
have a direct impact on business firms
(Recession affecting many industries)
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Indirect
Environment
Risk
Resulting from those environmental risks that
have a indirect impact on business firms
(Falling demand for goods, inventory piling up)
Natural Risk Associated with natural catastrophes likeearthquake floods an d fires (Tsunami)
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Methods of Assessing Risk
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Checklist of risks before a business firm
Counter-party Risk
Credit Risk
Settlement Risk
Industry Risk
Default Risk
Market Risk
Interest rate Risk
Exchange rate Risk
Transaction Risk
Availability Risk
Translation Risk
Price Risk
Liquidity Risk
Performance Risk
Spread Risk
Underwriting Risk
Fiduciary Risk
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Credit Risk Borrower fails to pay interest or capital or both
Counter-party Risk
The risk of creating contractual obligations withthird parties
Settlement
Risk
The risk that a transaction will not be settled
when it becomes due
Industry
Risk
The risk of being in a particular industry
classification
Default
Risk
The risk that a debtor will not will not honor his
obligations as per contact
Market
Risk
The possibility of adverse changes in market
prices
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Interest
rate Risk
The risk arising from changes in the market
interest rate
Exchange
rate Risk
The risk emanating from fluctuations in
exchange rate
Transaction
Risk
Risk resulting from dealing in different
currencies
Price Risk
Risk associated with movements in the prices
of various commodities
Liquidity RiskThe risk that convertibility of assets into cash
will be reduced
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Availability
Risk
The risk that new funds will not be available
adequately at the time of need
Performance
Risk
Risk that assets & liabilities will not perform
as per normal expectations
Spread Risk Risks associated with hedging through cross-market or cross asset position
underwrite
Risk
The risk assumed in the process of
underwriting
Fiduciary RiskRisk associated with actions taken on behalf of
the clients
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Expert based scoring system
Questionnaires
designed to assessenvironment risk
are sent to experts
Their opinions,
comments and
observations are
obtained
Differentparameters are
rated on the basis
of scores assigned
to each item in the
questionnaire
These scores areare averaged or
aggregated to
obtain a risk
index
These are used forinter-temporal or
cross national
comparisons
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Economic Methods
Factors
(Independent variables)
Economic environment
(Dependent Variables)
Which affect
Establish a model of cause-
effect relationship
Stated as a
mathematical equation
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Ranking and rating system
Country rating isdone on the basis
of a number of
factors
Economic,
financial, political
& social
parameters
Each parameter is
weighted
according to its
importance
Weighted
parameters are
assigned scores
according to some
preset guidelines
Different countries
or different sectors
are rated and
ranked on a scale
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Assessment of countrys creditworthiness
Creditworthiness of a country figures among the leading
indicators of its business environment risks. Countrieswith large internal & external public debts are poor
destinations for investmentMexico, Argentina, Brazil.
High internal
debt
Higher taxationPublic sector disinvestments
..Reduced expenditure on infrastructure
Excessive bureaucratic control
High external
debt
Import control
Exchange controls
Restriction on outward remittances
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CORPORATE STRATEGIES FORMANAGING ENVIRONMENT RISKS
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Approaches to managing risks
Risk
Avoiding
Strategies
RiskShifting
Strategies
Risk
Reduction
Strategies
.. Avoid politically sensitive products
.. Avoid sensitive regions.. Contractual agreements
.. Tie-up with other firms
Risk can be shifted to other parties
through insurance. A firm must be able to
identify the magnitude of various
insurable risks and take suitable cover
. Establishing a risk assessment system. Developing the local economy
. Legal Equity participation
. Good corporate citizenship
. Maintaining good political
relationship