Introduction
Risk management is a task similar to the other management functions such as marketing, purchasing or finance. Thus, if we look at economic development from a functional viewpoint risk management is somewhat every countries do which directs to the realisation of its overall economic objectives. The scenery of risk management shall be scrutinized first pursued by an argument on this research which focuses on the risk management of Palm, Inc.
Risk is everywhere. It is not hard to find risk. In almost every thing that we do and situations we face, there is a corresponding risk behind it. However, we cannot just run from it. All we can do to move forward is to manage this risk, or if not, at least lessen the risk involve. We can never tell what will happen unless we try to overcome it. Whether we like it or not, the world is such an unpredictable place. Moreover, as long as future uncertainties exist, which might cause adverse effects for individuals, the world remains to be a place in which risk must be managed.
Overview of Risk Management
Risk management started out as an indemnity management purpose. The cost of indemnity had restricted management’s alternatives in dealing with the hazards faced by the organisation. One of the foremost problems was that insurers rated firms according to business in such a way that a fine run firm that had few losses were required to pay for the claims of poorly run firms within the same industry. With this, the role of risk management appeared. Management began to make out that abridged losses intended reduced cost of risk. If risk managers reduced losses they could hold them themselves without resorting to indemnity. However, it took some time for industries to settle in risk management.
The delicate inquisitiveness in risk management is the result of a number of instantaneous drifts. Globalisation of trade and production has augmented financial and direct investment in unstable up-and-coming markets. Risk management has also ensnared consideration as a result of the recurring and well-publicised breakdowns linked with its execution. Regardless of the amplified academic and specialized concentration paid to risk management, common instances still occur when classy investors or firms experience abrupt, unexpected, and devastating losses.
To an economist, risk is described as the survival of ambiguity about potential upshots. Risk is a mean reason in economic existence for the reason that individuals and firms create immutable reserves in research and product improvement, inventory, plant and equipment and human capital, without knowing whether the potential cash flows from these funds will be adequate to pay off both debt and equity holders. If such genuine investments do not engender their necessary returns, then the financial claims on these returns will turn down in worth.
In addition to altering the extent of equity and debt in their capital composition, firms/business organisations can also influence their chance of liquidation by extenuating the risk disclosures they countenance. Firms/Business organisations come out to prefer between the types and degrees of disclosures, assuming those that they consider have an aggressive gain in supervision and laying others off into the capital markets. Other features of the firm’s processes such as the convexity of its tax lists, can also influence the amount to which administrators challenge to alleviate risks. Apparently, Besanko, Dranove and Shanley, (1996) believes that economists and strategic planners view risk management as being related to the issue of the boundaries of the firm. In this structure, the pronouncement to alleviate meticulous risks is comparable to the verdict to outsource a particular purpose. Thus, risk management, like technology, allocation, or level, is a basis of economical plus.
Classifications of Risks facing Palm, Inc.
Risk is defined as any source of randomness that may adversely affect a person or corporation. In connection with this, risk management is the reaction to such risk by individuals or businesses as they attempt to make sure that the risks in which they are exposed to are the risks in which they think they are actually being exposed to and want to be exposed (Culp, 2001).
Market Risk
Market risk within Palm, Inc. arises from the event of a change in some market-determined asset price, reference rate, or index. The said events define market risk further into two categories. The first event-type defines market risk based on the asset class type whose price changes impact the exposure in question. One common form of asset class-based market risk is the risk on interest rate, or risk that the balance sheet assets, liabilities, and off-balance sheet items of the firm (including its derivatives) will change in value as interest rates change. Other asset class-driven classifications of market risk include the changes in the value of an exposure attributable to exchange rates’ fluctuations, commodity prices, and values of equity.
Risk factors are any market-determined price, rate, or index value that impacts the flow of cash of an exposure. The discount rate comes into play when we are talking of the asset’s present value, although convention does not classify it as a risk factor. It is also typically improper to decompose risk factors into the non-traded exposures that may underlie them (Elliott, 2002).
Aside from the risk factors that influence the exposure value, the market risk of an exposure is also characterized on the basis of the way these risk factors impact its value. In this case, market risk is classified by the use of fraternity row (colorful argot). Similar trade practitioners and academics tend to refer to five types of market risk using Greek or Greek-sounding letters. These are delta, gamma, theta, and rho.
Liquidity Risk
Another type of risk within Palm, Inc. is the liquidity risk. It occurs in the event when cash inflows and current balances are not sufficient for it to cover the outflow requirements of cash. It often necessitates asset liquidation that is costly in nature, for the generation of temporary cash inflows. Market liquidity risk is also included in this type of risk. Market liquidity risk is the risk that is inhibited by volatile markets in the liquidation of losing transactions and/or the establishment of new transactions in hedging existing market risk exposures. The basis for liquidity risk is the risk of cash flows when they occur in time.
Credit Risk
This is the risk of the actual or possible non-performance of Palm, Inc. This can be subdivided into a variety of dimensions. Two of them are the settlement versus pre-settlement credit risk, and the direct versus indirect credit risk.
Pre-settlement credit risk arises from the possibility of a party’s failure to make favourable future settlements, or settlements not yet initiated. This results to the counterparties’ exposure to the risk of unexpected replacing of valuable assets in its then-current market prices. On the contrary, settlement risk is associated with the firm’s failure during the settlement window, or the time-period between the transaction’s confirmation and its final settlement. Herstatt risk is another term for this type of credit risk. One way of mitigating this settlement risk is by netting. Example is the cash flows in the same currency, if ever possible. Instead of A owing B and B owing A , the net payment of from B to A is the only cash flow that occurs within the settlement. Although this type of bilateral netting reduces the settlement risk of many financial transactions, contracts involving the exchanging of funds in different currencies or in assets, are impossible to be netted. Therefore, it is subjected to full settlement risk.
On the other hand, direct credit risk is the risk of the failure of the counterparty in delivering the required assets or funds or an increase in the perceived probability of the occurrence of such failure in the future. The former is called default risk, while the latter is termed as a downgrade risk. The direct credit risk borne by a company for both cases is limited to the counterparties and security issuers who have direct contractual relations to that company. Sometimes called credit-dependent market risk or spread risk, indirect credit risk is the risk that the value of an asset declines due to the credit rate change of some firms who have no direct dealings with the enterprise. Explained in a clearer way, the present value of a bundle of cash flows can alter the risk when the quality of a third party credit seems to change.
Operational Risk
Operational risk within Palm, Inc. is the risk imposed by situations such as failures in computer systems, internal supervision and control, or events like natural disasters. This further cause unexpected losses on a firm’s derivative positions. Other aspects relate to the quality of personnel and internal controls. One type of operational risk is the irresponsible trading activities by employees, or better known as fraud. On the contrary, the employment of unqualified personnel characterized by their inability to carry out their tasks responsibly is also an operational risk. It can also have similar consequences like that of fraud. In the case of operational risk, problems tend to rise. This is either due to the inadequate attention paid to some process or system, or to the personnel’s failure to perform their duties or ill-specified responsibilities. Therefore, people tend to be at the root for most operational risks, which comes from a questionable decision made by someone, either on purpose or by mistake.
Legal Risk
Legal risk is the risk of Palm, Inc. to incur a loss if the contract they thought to be enforceable turns to be the opposite in the actual situation. The Global Derivatives Study Group (1993) has identified several sources of legal risk for innovative financial instruments often associated with risk management. This includes conflicts between the formation of oral contracts and the statutes of frauds in some countries and jurisdictions, the capacity of particular entities in entering specific types of transactions, the enforceability of closeout netting, and the legality of financial instruments. Additionally, sudden changes in the laws and regulations can expose firms to potential losses, as well.
Measuring and Monitoring of Risk
A. Risk Analysis
Once Palm, Inc. has already identified the risk exposures to which they are involved with, the risk management process of the company now must include the process of actual comparison of the identified risks to the tolerances of bearing those risks as defined by the stakeholders of the company. The means of the monitoring and comparison is independent of the means of the risk measurement. Some companies may opt to the exploration of alternative methods of risk measurement to enhance their learning on the way of expressing their risk tolerances.
One of the most basic forms of reporting market risk is the nominal exposure report, a report indicating the amount of capital at risk in a given exposure or portfolio of exposures. Think about a pension plan treating equity and fixed income risk as normal risks. They consider it as a need to be able to fund its obligations. Suppose a currency exposure is a risk, which deems to be unnecessary for the plan’s liability funding purposes. Therefore, currency exposure can be tracked and measured, even relative to a policy-defined maximum (Kinney, 2003).
Risk analysis within Palm, Inc. involves identifying the most probable threats to an organization and analyzing the related vulnerabilities of the organization to these threats. It is detailed examination including risk assessment, risk evaluation, and risk management alternatives, performed to understand the nature of unwanted, negative consequences to human life, health, property or environment. It is also an analytical process to provide information regarding undesirable events. It is also the process of quantification of the probabilities and expected consequences for identified risks.
There are many security incidents or security-related occurrences or action likely to lead to death, injury, or monetary loss. There are many vulnerabilities in which a company or a person may be at risk.
B. Other Recommendations
A tie-up or merger of Palm, Inc. with various companies offers tremendous benefits in terms of access to their risk management policies, infrastructure and even its resources. However, this company must not lose sight of its core competencies while pursuing these tie-ups. Otherwise, the image of this company might be put in jeopardy.
Meanwhile, the collaboration of Palm, Inc. with its major competitors can be seen as a ridiculous move at first. However, upon close examination, this move could pave the way for this company to improve even more its risk management. The bottom line is both sides would be able significantly gain in such an alliance. Palm, Inc.’s strengths in product development combined with the risk management capabilities of their competitors can transform them suddenly into an unbeatable force to reckon with. One possible setback, however, is the differences in the cultures of the companies involved. Another possible setback could be whether any of the company’s competitors has the need to form alliances.
The third option also focuses on alliances, but this time with either one of the organizations specializing in risk management. The benefits of these alliances should outweigh the costs in the long run.
In terms of appropriateness, all three options are able to directly address the current issues mentioned. However, the question remains whether Palm, Inc. could be able to implement any of these options, and whether these options can be acceptable to the key stakeholders. Any merger or alliances may also involve the sharing of expertise. This company has traditionally relied on the inside-out approach. It is important to note that any merger transactions would have many implications on the company’s values and culture as well as the resources. The key stakeholders definitely would be concerned with such options and need to be convinced of the positive aspects. Somehow, Palm, Inc. will be able to overcome this barrier in managing strategic changes in the process of implementing any of the above mentioned strategic options.
CONCLUSION
The results of the analysis carried out on the risk management of Palm, Inc. indicated very significant effects, even amidst the threats of unrest. Therefore, we could conclude that the risk management of the company could still be expected to improve faster than average.
The review of the company’s risk management capabilities and resources revealed very little inconsistencies regarding the company’s strategies. This is coherent with their traditional inside-out approach. However, the need to reconcile both the inside-out and outside-in approaches becomes imperative now for Palm, Inc.
The risk analysis among the company environment as well as the risk management and capabilities of the company revealed certain gaps, most of which are biased towards the environment. However, these gaps paved the way towards determining a number of recommended strategic options to secure the company’s competitiveness.
Also, Palm, Inc. has to find a balance between adherence to internal forces within the management and to the changing forces of the environment in order to implement such strategic options.
Credit:ivythesis.typepad.com
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