industry. It is also necessary to consider stakeholders and their objectives and tolerance for risk.
Once a clear understanding of the risks emerges, appropriate strategies can be implemented in conjunction with risk management policy. For example, it might be possible to change where and how business is done, thereby reducing the organization’s exposure and risk. Alternatively, existing exposures may be managedwith derivatives. Another strategy for managing risk is to accept all risks and the possibility of losses.
There are three broad alternatives for managing risk: 1. Do nothing and actively, or passively by default, accept all risks.
2. Hedge a portion of exposures by determining which exposures can and should be hedged.
3. Hedge all exposures possible.
Measurement and reporting of risks provides decision makers with information to execute decisions and monitor outcomes, both before and after strategies are taken to
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mitigate them. Since the risk management process is ongoing, reporting and feedback can be used to refine the system by modifying or improving strategies.
An active decision-making process is an important component of risk management. Decisions about potential loss and risk reduction provide a forum for discussion of important issues and the varying perspectives of stakeholders. Factors that Impact Financial Rates and Prices
Financial rates and prices are affected by a number of factors. It is essential to understand the factors that impact markets because those factors, in turn, impact the potential risk of an organization.
Factors that Affect Interest Rates
Interest rates are a key component in many market prices and an important economic barometer. They are comprised of the real rate plus a component for expected inflation, since inflation reduces the purchasing power of a lender’s assets .The greater the term to maturity, the greater the uncertainty. Interest rates are also reflective of supply and demand for funds and credit risk.
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Interest rates are particularly important to companies and governments because they are the key ingredient in the cost of capital. Most companies and governments require debt financing for expansion and capital projects. When interest rates increase, the impact can be significant on borrowers. Interest rates also affect prices in other financial markets, so their impact is far-reaching.
Other components to the interest rate may include a risk premium to reflect thecreditworthiness of a borrower. For example, the threat of political or sovereign risk can cause interest rates to rise, sometimes substantially, as investors demand additional compensation for the increased risk of default.
Factors that influence the level of market interest rates include:
1、Expected levels of inflation 2、General economic conditions
3、Monetary policy and the stance of the central bank 4、Foreign exchange market activity
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