FINANCIAL RISK MANAGEMENT:

INTRODUCTION
Dr. Duke Ghosh, 2018
Indian Exports: Regime Change
• Post-Independent India
• Planned Economy – Socialist perspective
• Principle of self reliance
• Import substitution
• Exportable surplus

• 1991: Balance of Payments Crisis

• New Economic Policy
• Globalization, Privatization, Liberalization
• Principle of Export Led Growth
ELGH: Export Led Growth Hypothesis
• Beckerman (1965); Bhagwati (1978), etc.

• Exporters are encouraged to sell in the world market

• Forced to become more competitive
• Innovate and/or adopt new technology
• Exporters also bring competition in the domestic market
• Non-exporters also endeavour to become more competitive
• Economy wide adoption of new technologies
• Economy performs better
• Attracts international capital
• Increases capacity to produce
• Increases employment
 Million USD

50000

0
100000
150000
200000
250000
300000
350000
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
Exports by India

1986
1988
1990
1992
1994
Export Performance: India

1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Risk
• A risk is a potential problem – it might happen and it might
not

• Conceptual definition of risk

• Risk concerns future happenings
• Risk involves change in mind, opinion, actions, places, etc.
• Risk involves choice and the uncertainty that choice entails

• Two characteristics of risk

• Uncertainty – the risk may or may not happen, that is, there are no
100% risks (those, instead, are called constraints)
• Loss – the risk becomes a reality and unwanted consequences or
losses occur
Financial Risk
• Financial Risk: the quantifiable likelihood of loss or less
than expected returns
• Kolmogorov (1933) defines a stochastic process as (Ω, Γ, P) where
ω, an element of Ω represents the state of nature.
• The probability of an event A (A є Γ) represented by P(A) depends
on ω

• In the domain of finance, Γ can be imagined as a set of

returns from an investment decision (or the value of a
financial position). Theoretically the range of Γ is (-∞, +∞)

• However, in finance, we seldom regard the “upside” or

“gains” as risky; in financial risk, we deal with losses
Dimensions of Risk
• Market Risk: Risk of change in the value of a financial position due to
changes in the value of the underlying components on which the
position depends (stock and bond prices, exchange rates, commodity
prices, etc.)

• Credit Risk: Risk of not receiving the promised payments on

outstanding investments (loans and bonds) because of the default of
the borrower

• Operational Risk: Risk of losses resulting from the inadequate or

failed internal processes , people and systems

• Integrated Risk Management Approach: Should be a HOLISTIC

Approach – an integrated approach taking all types of risks (and their
interaction) into account.

• Current Models are yet to provide a satisfactory integrated platform

Risks for Exporters

Country Risk
Political stability, Credit Risk Currency Risk
policies, legal systems, Non payment, late Volatility in exchange
economic conditions, payment, fraud rates
cultural environment

Other Risks
Logistics Risk Documentation,
Theft, loss, damage administration,
protection of IPR, etc.
Proactive vs. Reactive Risk Management
• Reactive risk strategies
• "Don't worry, I'll think of something"
• Nothing is done about risks until something goes wrong
• The management then flies into action in an attempt to correct the
problem rapidly (fire fighting)
• Crisis management is the choice of management techniques

• Proactive risk strategies

• Steps for risk management are followed
• Primary objective is to avoid risk and to have a contingency plan in
place to handle unavoidable risks in a controlled and effective
manner
Pillars of Risk Management
Risk
Management

Identification Measurement Management Monitoring of

of Risk of Risk of Risk Risk

Revisit Risk
Sources Exposure Avoidance Management
Plan

Prioritization Shifting

Sharing
CAN RISK BE MADE ZERO?
Your Take!

Market Risks (Systematic Risks)

Firm Specific Risks (Unsystematic Risks)
Total Risk = Systematic Risks + Unsystematic Risks
Minimization!
THANK YOU
duke.ghosh@globalchangeresearch.in