Risk can be defined as an exposure to events, or a choice of actions, which may lead to undesirable consequences. Risk arises from the uncertainty, inherent to most of the process in the world. The risk considered in this paper includes economic risk, political risk, exchange rate risk, product risk, price risk, and customer risk. Economic risk refers to the possibility of a decline in the economy, which may have a negative effect on investments and business development. Political risk is closely related to the economic one, and denotes the risk that the government will alter regulations, thus affecting investment opportunities. The risk of a reduction of the return on investment due to the change in currency rates refers to the exchange rate risk. Product risk is related to the probability of the demand for products not to reach the predicted level. Price risk considers the uncertainty of the future prices, while customer risk describes the unpredictability of customer behaviour and the possibility of the loss of clients.
In order to manage risks, it is common to adopt several strategies. Thus, it is possible to design a risk management plan, which would consider the possible risk factors, the likelihood of their occurrence and their consequence, which are followed by communicating the risks and developing an action plan for minimizing them. The plan should be accompanied by continuous progress monitoring and feedback mechanisms, which can help to maintain the level of risk under control. The most straight-forward method to reduce risk is to diminish uncertainty of the environment by collecting additional information. Thus, market research and close examination of current trends can help to decrease all of the abovementioned kinds of risk. Hedging the risk is the most common strategy for risk management. Thus, for currency risk it is common to hedge by using forward exchange contracts, which fix future exchange rates for the parties ("Maps of World"). Risk can be managed also more naturally by investing in several markets or products, thus diversifying portfolio and reducing the risk in all the abovementioned categories. However, in general the higher the risk the more the returns. Therefore, the degree of protection against risk depends on the company’s strategy. Risk-averse organizations tend to use hedging and diversification extensively, while risk prone ones prefer larger returns and higher risks.
References
"Currency Risk Management." Maps of World. MapXL Inc., n.d. Web. 2 Dec 2011.
