QUESTION THREE Discuss how interest rate swaps and currency swaps might be of value to the corporate financial manager. b) Risk management is concerned with understanding and managing the risks that...

QUESTION THREE

1. Discuss how interest rate swaps and currency swaps might be of value to the corporate financial manager.


2. b) Risk management is concerned with understanding and managing the risks that an organization faces in its attempt to achieve its objectives. These risks will often represent threats to the organization – such as the risk of heavy losses or even bankruptcy. Risk management has traditionally associated itself with managing the risks of events that would damage the organization.
   Organizations face many different types of risks including financial risk, financial risks relate to the financial operation of a business– in essence, the risk of financial loss (and in some cases, financial gain) – and take many different forms.

These include currency risks, interest rate risks, credit risks, liquidity risks, cash flow risk, and financing risks. The importance of these risks will vary from one organization to another. A firm that operates internationally will be more exposed to currency risks than a firm that operates only domestically; a bank will typically be more exposed to credit risks than most other firms, and so forth. It is therefore incumbent upon management of firms to put all relevant structures in place to ensure that financial risks are well managed because Firms can benefit from financial risk management in many different ways.

Required:

Discuss the benefits of managing financial risks in a company.