Financial Risk Management

        Financial Risks against Operating– The financial operations of a company can be emanated by risks such as the combination of its equity, debt, and some other types of financing or its operations as well. Considering an example, even the rise in interest rates can expose the company to financial risks. Meanwhile, a rise in the cost of raw materials is able to produce an operational risk. As far as business operations are concerned, the categorization of financial and operating risks is usually utilized in the mitigation, assessment, and identification of risks.

Model Risk of Financial Risk Management

        Actually, there are various techniques and tools involved in the management of financial risk. Some of them have been discussed in the previous section has well. In this section, however, the techniques which are utilized by risk managers for resisting exposure are going to be discussed. If there is a company that wishes to minimize its exposure in terms of risks, there are actually several ways that can be used by it. The techniques which are going to be explained, some of them are implemented in the normal investment and financial decisions that almost every other company produced in the long run of operations and functions (Kanno 2015).

        Barclay bank is a major banking organization and have preference in many countries across the globe. It’s a British multinational corporation who is based in London UK. Barclay Bank was established in the year 1690 and over the years it grow and become a major organization. Barclay bank provided the services of corporate banking, wealth management & investment management. According to 2017 data the corporation revenue is 21.076 billion. The net income of the corporation was 0.894 billion. The total equity of the organization is 66.016 billion. As the corporation has presence in parts of the world it has to face many market risks therefore Barclay needs a strong risk management strategy to mitigate the risk.

The financial risks are those risks which are related to the financial activities of the banks and have major impact on the financial conditions of the bank. The main financial risks include credit risk, liquidity risk & market risk.

        The liquidity risk has major impact on the financial performance of the banking corporations. The liquidity risk arises when the corporation unable to pay its short term obligation.  It is important for the banks to maintain enough cash from which they can perform their routine activities efficiently and can pay short term loans. However sometimes did not focus on the liquidity position and perform such activities which leads to excessive cash outflow. When the excessive cash out flow occurs company did not have enough cash to meet its obligation. Therefore liquidity risk arises which can cause various issues for the banking organizations (García 2017).

        Barclays manage its liquidity risk quite efficiently. Barclay manage its liquidity by not investing in such activities which leads to excessive cash outflow. The markets that are illiquid allow the corporation to hold assets instead of disposing them off. The corporation’s strategies allow the financial managers to maintain sufficient amount of cash so that it can meet its short term obligations efficiently.

        The credit risk has huge significance for the banking corporations because if the corporation does not manage credit risk efficiently it can suffer from financial loss. The credit risk is related to the loans which the banks given to their clients. Sometimes the client unable to return the loan which leads to financial loss. It is important for the banks to investigate the financial condition of their clients before providing them loans. The global banking crises occur because bank provided loan to various client without analyzing their financial condition. If the banks analyzed their condition then they might not face credit risk issues.

        Barclays is managing the credit risk through adopting various risk mitigation strategies. Barclay before providing loan services assess the financial condition of their client so that Bank won’t face any credit issue. The strict policies of the bank has provided quite efficient for the bank in managing the credit risk (Cox 2007).

        There’s little question that insurance is that the main typical vehicle for maintenance assets against exposure. However, insurance doesn't remove risk however rather allocates risk from the business buying the quilt to the firm providing coverage against the proximate cause.Purchasing amount against exposure to risks is one in every of the oldest and most established technique of hedging against specific event risks. . They are always growing. Options, swaps, forwards, and futures are commonly used in the management of financial risk (Kanno 2015).

        It is true that derivatives have been practiced by firms for a long time. However, their access has been bound all the while as well considering the fact that they have to be changed for every other company to meet the requirements. Standardizing the derivative services and products became important after the evolution of options markets and future in 1980 and during the upcoming decade. Due to it, companies and individuals got the power of hedging against some certain risks in the finance. For hedging, there are many instruments concerning the derivatives and such tools don’t remain static. They are always growing. Options, swaps, forwards, and futures are commonly used in the management of financial risk (Christoffersen 2011).

        When payoff profiles are involved, options become entirely different from futures and forwards. The right of purchasing characterized assets is given to the buyer by a call option at an absolute rate at a time before the contract’s expiration. Meanwhile, the buyer is given the right to sell at any time by the put option. Among futures and an option, there are two important variations or differences. First of all, protection is provided by options when downside risks are concerned. However, parties are allowed to gain an advantage from a potential that is upwards. Specifically, forwards and futures keep the parties away from downward risks and eliminate the upside potential. At the second point, explicit costs are harnessed by options while futures and forwards have implicit costs. Even the costs related with put options’ purchase have to be faced by parties other than transaction costs and settlement costs (Christoffersen 2011).

        Since derivatives are concerned, a sway is just another type which gives the ability of exchanging financial instruments’ cash flows. These cash flows can be determined through principal amounts which are notional. Compared to options, futures, and forwards, the notional amount of swap is not always shared among parties. Swaps can be collateral and in the form of cash as well though. Mainly, swaps are utilized by firms for resisting inherent risks. However, some use them for speculation processes on modifications in the underlying prices which are expected. Similar to futures, tailoring and trading over-the-counter are also involved.

        By the ending of 2013, the integrated new capital requirements by proposals of Basel 3 are expected to be drafted finally in the EU. With the integration of Basil 3, the cumulative rise in prices might imply that more capital is held by banks especially when it comes to the common equity. Its impact is to decrease the bank’s assets which are risk-weighted by decreasing the exposure’s level only to keep enough return concerning the equity and attracting investors. If more capital is tied different portfolios and assets, it might be capable of attracting management of a bank to raise the rates of assets for achieving returns’ same level and keep the profitability as well.

        The costs and the size of integrating the model have been underestimated by various banks and thus they failed to produce a suitable system for it. Sure the integration will commence later on. However, it is important corporations to mind the factor of costs as well. But there are several banks gaining benefits from the momentum that is achieve from the primary necessities for instituting more basic management systems of operational risk.

        By sending liquidity premiums without any interruptions within the internal unit of a business, the composition of liabilities can be efficiently managed. Therefore, the transfer of premiums to business will take place on the basis of liabilities’ behavioral life, contingent risks, and assets. Such a transfer is crafted for ensuring the reflection of liquidity in product pricing and performance to make sure that the integration of framework is proper and authentic. Potential profits will be wiped away due to the danger that is imposed with adverse movements for a company functioning in a global market or industry.

        The working of a forward contract is quite simply actually. It works in a way that the rate of foreign currency will be determined at a future date. Such a date is set when transaction is carried out. The real currency’s exchange, however, is carried out with the execution of contract. Through the implementation of such a technique, payment procedure, exchange date, exercise date, and the transaction’s value are evaluated in advantage. Thus, there is no exchange before the date of settlement (Erickson 2014).

        For performing this, there are three steps used by a firm: if foreign currency is involved in a future payment, the firm would have to buy a currency amount’s equivalent with the utilization of spot rate. Later on, the borrowed money will be inserted in a bank which is domiciled in a country that is foreign allowing the rates of interest. With the rate of interest at the investment’s maturity, the gathered investments’ actual amount will become equal to the amount which is needed for making payments or deliveries to creditors. A withdrawal will be made by the company at the date of payment and company will pay using another currency than the native one.

        Model risk in finance is actually the loss’s risk due to the utilization of wrong models for making decisions in the company while financial securities are concerned. But it is more apparent in other activities such as prediction of real-time profitability, assigning scores of customer credits, and computing profits. In 2002, Rebonato defines it as the occurrence’s risk concerning an important difference among value of mark-to-model of a difficult illiquid equipment and at a rate which reveals the trading of same instrument. 

References of Financial Risk Management

Christoffersen, Peter. 2011. Elements of Financial Risk Management. Academic Press.

Cox, Dennis W., ed. 2007. Frontiers of Risk Management: Key Issues and Solutions. Euromoney Books.

Erickson, K.H. 2014. Financial Risk Management: A Simple Introduction. K.H. Erickson.

García, Francisco Javier Población. 2017. Financial Risk Management: Identification, Measurement and Management. Springer.

Kanno, Masayasu. 2015. "Assessing systemic risk using interbank exposures in the global banking system." 20: 105-130.

Zopounidis, Constantin, and Emilios Galariotis. 2015. Quantitative Financial Risk Management: Theory and Practice. John Wiley & Sons.