Risk Management Process

The process of financial risk management comprises strategies that enable an organization to manage the risks associated with financial markets. 

Risk management is a dynamic process that should evolve with an organization and its business.  It involves and impacts many parts of an organization including treasury, sales, marketing, legal, tax, commodity, and corporate finance. 

The risk management process involves both internal and external analysis.  The first part of the process involves identifying and prioritizing the financial risks facing an organization and understanding their relevance.  It may be necessary to examine the organization and its products, management, customers, suppliers, competitors, pricing, industry trends, balance sheet structure, and position in the industry. It is also necessary to consider stakeholders and their objectives and tolerance for risk. 

Once a clear understanding of the risks emerges, appropriate strategies can be implemented in conjunction with risk management policy. For example, it might be possible to change where and how business is done, thereby reducing the organization’s exposure and risk.  Alternatively, existing exposures may be managed with derivatives.  Another strategy for man-aging risk is to accept all risks and the possibility of losses. 

There are three broad alternatives for managing risk:

1.Do nothing and actively, or passively by default, accept all risks.

2.Hedge a portion of exposures by determining which exposures can and should be hedged.

3.Hedge all exposures possible.

Measurement and reporting of risks provides decision makers within formation to execute decisions and monitor outcomes, both before and after strategies are taken to mitigate them.  Since the risk management process is ongoing, reporting and feedback can be used to refine the system by modifying or improving strategies. 

An active decision-making process is an important component of risk management. Decisions about potential loss and risk reduction pro-vide a forum for discussion of important issues and the varying perspectives of stakeholders.