Risk management strategies Essay

In terms of areas of occurrence and risk management capabilities, risks are divided into external and internal.
External risks include the risks associated with changes in the external environment on the company and not directly dependent on its activities: political, legal, social, and general economic risks that arise in the case of aggravation of economic crisis, political instability, war, ban on payments abroad, consolidate debts, embargo, differences between import licenses, natural disaster (fire, flood, earthquake), privatization, nationalization, inadequate regulation, etc. (Brigham & Houston, 2009). The impact of external risks on the effectiveness of the company is exceptionally high, while the management of these risks is the most difficult and sometimes impossible task. For their estimation, in logical methods of analysis are mainly used.
Internal risks include the risks that arise directly in connection with the activities of a particular company. The wider range of customers, partners, relationships, operations, services is, the more the number of internal risk accompanying the company is (Brigham & Houston, 2009). Compared to external risks, internal risks are better subject to identification and quantification. The task of management here is to detect, assess, minimize and continually monitor internal risks by using appropriate techniques.
Among the whole range of risks the company faces in the financial sector, credit risk is one of the most common. The management and insurance of this risk is an integral part of corporate activity. Credit risk is the probability of negative changes in value of assets (loan portfolio) as a result of the inability of counterparties to perform their obligations, in particular, on payment of interest and principal of the loan in accordance with the terms and conditions of the loan agreement. To credit risk includes the risk of loan default, deposit, leasing, factoring, forfeiting (Goodhart, 2005, pp. 118-127; Saunders & Allen, 2010).
Until recently, the range of instruments used to maintain insurance of credit risk was very small. To meet the needs of banks and companies in protection against various forms of insolvency of customers and contractors such well-known and popular methods were used as the conclusion of insurance contracts while issuing bonds, the use of letters of credit.
Due to increased market competition, increased number of bankruptcies in the corporate and banking sectors, most financial market participants show a clear need for alternative methods of insurance that provide a protection against credit risk with any features (Saunders & Allen, 2010).
The emergence of the production financial instruments that provide effective insurance and redistribution of credit risk revealed new opportunities for banks and businesses. The main achievement of recent years has been the official recognition as a priority the development of self-organized market instruments that insure credit risks. The market of derivatives linking all the production tools that provide credit protection was created as a separate segment (Orlitzky, 2003, pp. 403-441).
Credit derivatives are swaps, options, warrants, forward or other similar tool, according to the terms of which the payments on one side or both sides are based on changes in the value of credit or obligation. With the development of financial market, its participants will be able to fully get the unique opportunity provided by these tools (Saunders & Allen, 2010).