FINANCIAL RISK MANAGEMENT IN INTERNATIONAL ACCOUNTING

FINANCIAL RISK MANAGEMENT IN INTERNATIONAL ACCOUNTING

FUNDAMENTAL THINGS

Main objectives of financial risk management is to minimize the potential loss arising from unexpected changes in currency rates, credit, commodities, and equities. The risk of price volatility faced is known as market risk.

Market participants tend not to take risks. Intermediary financial services and a market maker responds by creating a financial product that allows a trader to shift the risk of unexpected price changes to others-the other side.

There is market risk in various forms, other risks:

1.      Liquidity risk arises because not all the financial risk management products can be traded freely. Highly illiquid market is such as real estate and stocks with small capitalization.

2.       Market discontinuity refers to the risk that the market does not always lead to price changes to survive. Stock market crash in 2000 is a case in point.

3.      Credit risk is the possibility that the other party in the contract risk management can not meet its obligations. For example, the parties agree to exchange the euro versus the French into the Canadian dollar may fail to submit the euro on the date promised.

4.      Regulatory risk is the risk arising from public authorities banned the use of a financial product for a particular purpose. For example, Kuala Lumpur stock exchange does not allow the use of shrot sales as a means of hedging against the decline in equity prices.

5.      Tax risk is the risk that certain hedging transactions can not obtain the desired tax treatment. For example, treatment of foreign exchange losses as capital gains as ordinary income to be preferred.

6.      Accounting risk is the chance that a hedging transaction can not be recorded as part of the transaction is hedged about. An example is when the advantage over a hedge against the purchase commitments are treated sebgaai "other income" rather than as a reduction of purchasing costs.

MANAGING FINANCIAL RISK WHY?

The growth of risk management services that quickly shows that management can enhance shareholder value by controlling the financial risk. If the value of the company to match the present value of future cash flows, active management of potential risks can be justified by several reasons.

First, exposure management helped in stabilizing the company's cash flow expectations. Flow is more stable cash flows that can minimize earnings surprises thus increasing the present value of expected cash flows. Active exposure management allows companies to concentrate on the major business risks.

Lenders, employees and customers also benefit from exposure management. Finally, because of losses caused by price and interest rate risk of certain transferred to the customer in the form of higher prices, limiting exposure management of risks faced by consumers.

THE ROLE OF ACCOUNTING

Management accountants to help in the identification of market exposure, quantify the balance associated with alternative risk response strategy, the company faced a potential measure of risk, noting certain hedging products and evaluate the effectiveness of the hedging program.

1.      Identification of Market Risk

The basic framework is useful for identifying different types of market risk that could potentially be referred to as risk mapping. This framework begins with the observation of the relationship of the various market risks triggering a company's value and its competitors. And usually referred to as cube mapping risk. The term trigger value refers to the financial condition and performance items that affect the financial operations of the main value of a company. Market risks include the risk of foreign exchange rates and interest rates, and commodity price risk and eukuitas. The third dimension of the cube mapping risk, look at the possible relationship between market risk and trigger values ​​for each of the company's main competitor.

If a competitor to buy baseball caps from abroad and the country's currency depreciates in value purchase source relative to the currency of your country, then these changes can cause your competitors are able to sell at lower prices than you. This is referred to as the risk of facing currency competitive.

2.      Balancing quantify

Another role played by accountants in the process of risk management involves balancing the quantification process relating to the alternative risk response strategies. Accountants must measure the benefits of protected areas assessed and compared to the cost plus the opportunity cost of lost profits from speculation and market movements

3.      Risk Management in the World with a Floating Exchange Rate

The risk of foreign exchange (forex) is one of the most common form of risk and will be faced by multinational companies. In a world of floating exchange rates, risk management include:

            a.       anticipation of exchange rate movements,

            b.      measurement of exchange rate risks facing the company,

            c.       design of appropriate protection strategies, and

            d.      the manufacture of internal risk management controls.

Source :

http://ikapurple.blogspot.com/2011/05/manajemen-risiko-keuangan-dalam.html