Value at risk analysis
Value at risk analysis approach is one of the techniques that have been widely used to quantify and measure financial risks with a given period in an organization, a financial institution or even an investment portfolio. Risk managers utilize Value at risk (VaR) to counter risk levels through the application of counters and measures.
The latter is critical in determining the levels at which a firm can absorb its losses. It is imperative to note that VaR can be measured in three variables. These include the time frame within which a firm can absorb losses, the amount of loss and the confidence level.
Theoretically, VaR is calculated using three distinct methods through the application of Monte Carlo simulation. In this case, users can execute multiple hypothetical trials on price returns of stocks being sold..
Variance-Covariance
Unlike the historic al method which uses actual data, this method employs familiar curves. Besides, the historical method organizes actual data returns in a systematic manner.
Credit value adjustment
Credit value adjustment (CVA) is used to hedge a firm from possible losses that might arise when counterparty default takes place. It also minimizes the amount of capital required in the calculation of CVA.
Different strategic risk management paths
Risks are known to drive several firms to develop new strategies on a daily basis which they use exploit and take advantage over the risks while generating value. This has led to the desire of any firms to engage their activities in emerging markets that have low or substantial economic and political risks.
While this minimizes risks, it limits a firm’s ability to exploit other potential markets. Besides, some have embraced IT in order to gain advantage over increasing competition. However, technology has been affected by a number of issues such as cybercrimes, hacking and credit frauds.
Businesses are impacted negatively by such setbacks. Risk and value taking are some of the paths that firms embark on since they employ the model of cash flow to pay off risks. This is manifested in managing cash flows on existing investments by making better financialdecisionsbased on the risks a firm takes. In this case, a risk-averse company will ensure that it engages in few investments.
Outlineof risk management approach
The use of appropriate approach to riskmanagement is critical in entrepreneurship. An outline of these approaches entail:
- Exploitation of risks. This involves responding to risks in a firm in the most effective manner. Exploiting risks involves getting access to timely and accurate information on competitors, events and equally responding to them in an effective manner. The response must be fast enough. Hence, a threat from any source can be transformed into an opportunity.
- Utilizing the merits of information. Access to invaluable information by a firm is vital in the process of risk management. Gaining knowledge requires investment in information networks. A firm might use joint venture partners, creditors and suppliers to access the much-needed information.
- Quick or prompt response. In essence, a quick response is normally determined by the quality of information availed to an organization, the level of consequence presented by a risk and rationale behind the response. An appropriate response in managing risk is a major factor towards organizational success.
- The merit of experience. Past experience of a crisis from a risk provides a firm with an advantage of dealing with a problem. In the event of a risk, a firm might opt to reduce investments and create flexible pricing models. Other approaches include:
- Resource advantage
- Flexibility
- Corporate governance
- Risk exploitation