Introduction
Companies have to deal with various types of risk all the time while conducting their projects. It affects the budget and schedule of the project if not properly managed. Thus, a CFO is responsible for managing the finance of the company such as coordination of financing and funding, expenditure and liquidity, budgeting and financial reporting and is crucial to deal with risks associated (Guorio,2012). Moreover, fundamental skills such as budgeting, compliance, and risk management are necessary to effectively deal with or prevent risk. In a company, a CFO is responsible for having an appropriate response procedure in an event that risk occurs while assessing various insurance coverage to ensure the best operational, strategic and financial response to any risk (Mikes, 2011). Thus, proper use of risk management and prevention strategies will allow its avoidance before damage to an initial project in the company. This essay expounds on risk in companies, how they can be treated and how other companies deal with the risk.
Interest rate risk is one of the general risks that is associated with investing in a new country such as Guyana. There is a high degree of uncertainty that poses a risk that could lead to losses to the investors. According to Aven (2016), developing countries tend to have higher interest rates as compared to developed countries thus causing bond and stock prices to fall. Moreover, when new bonds are issued, they will have higher coupons making low bond coupons to be issued in the lower rate environment which are worth less. Also, Guorio (2012) states that with more fluctuation of the interest rates, there is a rise in interest paying back thus creating a probability to run into liquidation posing a risk to the investors. Thus, when investing in a new country it is crucial to check and analyze the potential risks to avoid losses. For example, Flexotech inc. investors have become reluctant to bid up prices as future earnings look less attractive due to high-interest rates.
Myer industries may lose investment due to specific risks that affect the company such as interruption from natural disasters, lack of transparency and opaque stocks among others. According to Wachinger et al (2013), natural disasters in Guyana negatively affect the financial welfare causing uncertainty in investments. Capital assets and infrastructure such as equipment, human capital, and roads are lost causing a shortcoming in the industries. Thus, it will pose a risk to the company making it difficult to meet the demand and their earnings will suffer. Virlics (2013) states that this will affect the investment as it may cause bankruptcy and business closure due to the damage caused that may be felt over a long period. Sales of portable fuel tanks and water containers will reduce causing lower revenue and higher risk to the industries. For example, as Guyana is at risk of floods, it creates a huge risk to Myer industries and their products as it may lead to decreasing production output and poor production efficiency.
As a CFO in the organization, while investing in a new country, avoiding or transferring the risk may be one of the methods to treat the risk. Damodaran (2013) states that buying bonds with different durations or hedging fixed-income investments with interest swaps ensures that risk is transferred and avoided. Moreover, it reduces the exposure to investment risk where one party may pay a fixed interest rate and receive a floating rate while the other pays a floating rate and receives a fixed rate. Also, matching the maturity and repricing of terms of assets and liabilities will ensure that risk on investments is avoided. According to Lettau and Ludvigson (2010), anticipating the value changes will help in treating the risk by creating a plan and strategies to curb and ensure investment is stable. For example, Flexotech inc. uses interest rate floors to reduce expenses thus ensuring that the high-rate interest rate risk is avoided.
Furthermore, creating a strategy and a plan on awareness, prediction, preparedness and warning systems can avoid or optimize the risk. Addressing the current risks while putting up measures such as insurance coverages will ensure that risk is treated either by absorption, retaining or avoidance. According to Blanchard (2019), lessening the adverse impacts by constructing flood defences and building construction codes will ensure that huge losses and risks in the business are avoided. For example, Myer industries improve infrastructure to ensure that risk is mitigated and business is run smoothly. Moreover, creating a plan on the possibility of the impact to be caused by the disaster ensures that insurance coverage is taken to help in risk transferring and sharing the cost without having to fall into closure due to damage (Glendon, Clarke and Mckenna,2016). It creates a great platform for the Myer industries to partner with relevant coverages and help in restoring the products and resources destroyed.
ExxonMobil has been affected by fluctuating interest rate risk in Guyana. According to Aven, (2016), risk management such as probability, prevention, avoidance and measures have resulted in ensuring they are the biggest oil company in Guyana. The company analyzes the probability of how the stock market will be in the next few days and then make a prevention measure. By identifying the knowns, they figure out on preventing them while assessing on also the unknowns. Moreover, they can determine when to invest and buy when the risk is low ensuring they have a competitive advantage. With this, the avoided decline keeps more money in the business and there is availability to capitalize on future opportunities even when the rates rise to project them at a safe point. Furthermore, this is used to analyse where the stock-bond by creating measures, for example, in 2021, using the Sortino ratio when lower was better to analyze risk management as it gave them their achievements in investments (Lustig, Roussanov and Verdehan,2011).
Other companies such as ExxonMobil have gained a competitive advantage in the natural disaster risks as they avoided the risk by transporting their oil through pipelines. Achieving and planning on how to mitigate the risks caused by floods such as shortage of infrastructure ensured that risk is avoided and minimal losses are felt. Moreover, as ExxonMobil provides support relief to the regions affected by floods, they can transfer the risk by creating a plan to eliminate the threats as well as avoiding the tarnishing of climate change as it happened before (Guorio,2012). With this, the company builds a seawall to reduce the risk of polluting the environment which will in turn cost them to clean up later thus their losses. According to HH, it ensures that the specific risk on the company is averse, products are saved and returns on investments are made.
Conclusion
Risk management is necessary in ensuring that the general and specific risks are kept at bay to avoid damage to the company. When interest rate risk is high, the bonds and stocks tend to fall causing the investment to pose a greater risk to investors. Moreover, in Myers industries, natural disasters affect the product posing risks to humans, products and businesses that could lead to damage that cannot be repaired. With this, to ensure that risk is avoided risk management is crucial, for example, avoidance, optimization and transfer to either insurance coverages or swapping of bonds to mitigate and treat the risk. Moreover, other companies such as ExxonMobil use planning and strategies to analyze how to treat the fluctuating interest rates. Also, the creation of pipelines to transport oil as compared to roads has acted as a way to treat the risk of natural disasters. To avoid risk, keen planning and flowing up on budgets and risk strategies will ensure that risk is maintained or avoided.
References
Aven, T., 2016. Risk assessment and risk management: Review of recent advances on their foundation. European Journal of Operational Research, 253(1), pp.1-13. https://www.sciencedirect.com/science/article/pii/S0377221715011479
Blanchard, O., 2019. Public debt and low-interest rates. American Economic Review, 109(4), pp.1197-1229. https://www.aeaweb.org/articles?id=10.1257%2Faer.109.4.1197&utm_medium=email&utm_source=govdelivery
Damodaran, A., 2013. Equity risk premiums (ERP): Determinants, estimation and implications–The 2013 edition. Managing and measuring risk: Emerging global standards and regulations after the financial crisis, pp.343-455. https://books.google.co.ke/books?hl=en&lr=&id=PPG6CgAAQBAJ&oi=fnd&pg=PA343&dq=risk+assessment+in+guyana+cfo&ots=NR4bVICNOL&sig=KmPgiua5Q_dWo5TIP2Cvi0emkz0&redir_esc=y#v=onepage&q&f=false
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Lettau, M. and Ludvigson, S.C., 2010. Measuring and modelling variation in the risk-return trade-off. Handbook of financial econometrics: Tools and techniques, pp.617-690. https://www.sciencedirect.com/science/article/pii/B9780444508973500146
Lustig, H., Roussanov, N. and Verdelhan, A., 2011. Common risk factors in currency markets. The Review of Financial Studies, 24(11), pp.3731-3777. https://academic.oup.com/rfs/article-abstract/24/11/3731/1589752
Mikes, A., 2011. From counting risk to making risk count: Boundary-work in risk management. Accounting, organizations and society, 36(4-5), pp.226-245. https://www.sciencedirect.com/science/article/abs/pii/S0361368211000225
Virlics, A., 2013. Investment decision-making and risk. Procedia Economics and Finance, 6, pp.169-177. https://www.sciencedirect.com/science/article/pii/S2212567113001299
Wachinger, G., Renn, O., Begg, C. and Kuhlicke, C., 2013. The risk perception paradox—implications for governance and communication of natural hazards. Risk analysis, 33(6), pp.1049-1065. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1539-6924.2012.01942.x
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